See accompanying notes to the unaudited condensed consolidated financial statements
The Providence Service Corporation
Notes to the Unaudited Condensed Consolidated Financial Statements
SeptemberJune 30, 20172019
(in thousands except years, share and per share data)
1. Organization and Basis of Presentation
Description of Business
The Providence Service Corporation (“we”, the “Company” or “Providence”), through its subsidiaries and other companies in which it owns interests, is primarily engaged in the provision of healthcare and workforce development services for public and private sector entities seeking to control costs and promote positive outcomes. The subsidiaries and other companies in which the Company holds interests comprise the following segments:
Non-Emergency Transportation Services (“NET Services”) – Nationwide providerlargest manager of non-emergency medical transportation (“NET”) programs for state governments and managed care organizations.
Workforce Developmentorganizations (“MCOs”) in the United States (“U.S.”). The Company’s NET Services (“WD Services”) – Global provider of employment preparationsegment operates under the brands LogistiCare and placementCirculation. Additionally, the Company owns a minority investment in CCHN Group Holdings, Inc. and legal offender rehabilitation services to eligible participants of government sponsored programs.
its subsidiaries (“Matrix”). Matrix Investment – Minority interest inis a nationwide provider of in-home care optimizationhome and management solutions,mobile-based healthcare services for health plans in the U.S., including comprehensive health assessments (“CHAs”), quality gap closure visits, “level of service” needs assessments, and post-acute and chronic care management, providing such services through a network of community-based clinicians and a fleet of mobile health clinics with advanced diagnostics capabilities.
During 2018, the Company announced an organizational consolidation plan ("Organizational Consolidation") to members of managed care organizations, accounted integrate substantially all activities and functions performed at the corporate holding company level into its NET Services segment. As the Organizational Consolidation was substantially complete beginning January 1, 2019, our former Corporate and Other segment was combined with the NET Services segment. See Note 8, Restructuring and Related Reorganization Costs, and Note 16, Segments, for as an equity method investment.further information.
Basis of Presentation
The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”). The FASB establishes accounting principles generally accepted in the United States (“GAAP”). Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification (“ASC”), which serves as the single source of authoritative non-SEC accounting and applicable reporting standards to be applied byfor non-governmental entities. All amounts are presented in United States (“U.S.”) dollars, unless otherwise noted.
The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information, and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for the fair presentation of the results of the interim periods have been included.
The Company has made estimates relating to the reporting of assets and liabilities, revenues and expenses and certain disclosures to preparein the preparation of these unaudited condensed consolidated financial statements in conformity with GAAP. Actual results could differ from those estimates. Operating results for the three and ninesix months ended SeptemberJune 30, 20172019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017.2019. Management has evaluated events and transactions that occurred after the balance sheet date and through the date these unaudited condensed consolidated financial statements were filed with the SEC and considered the effect of such events in the preparation of these unaudited condensed consolidated financial statements.
The condensed consolidated balance sheet at December 31, 20162018 has been derived from the audited financial statements at that date but does not include all the information and footnotes required by GAAP for complete financial statements. The unaudited condensed consolidated financial statements contained herein should be read in conjunction with the audited financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2018.
The Company holds investments that are accountedaccounts for its investment in Matrix using the equity method. Themethod, as the Company does not control the decision-making process or business management practices of these affiliates.Matrix. While the Company has access to certain information and performs certain procedures to review the reasonableness of information, the Company relies on the management of these affiliatesMatrix to provide accurate financial information prepared in accordance with GAAP. The Company receives audit reports relating to such financial information from the affiliates’Matrix’s independent auditors on an annual basis. The Company is not aware of any errors in or possible misstatements of the financial information provided by its equity affiliatesMatrix that would have a material effect on the Company’s condensed consolidated financial statements. See Note 5, Equity Investments, for further information.
Reclassifications
We have reclassified certain amounts relating to our prior period results to conform to our current period presentation. On October 19, 2016, affiliates of Frazier Healthcare Partners purchased a 53.2% equity interest in CCHN Group Holdings, Inc. and its subsidiaries (“Matrix”)In conjunction with Providence retaining a 46.8% equity interest (the “Matrix Transaction”). Prior to the closing of the Matrix Transaction, the financial results of Matrix were includedchange in the Company’s Health Assessment Services (“HA Services”) segment. Operating results for this segment are reportedorganizational structure as discontinued operations, net of taxdescribed in theNote 16, Segments, we reclassified certain costs between “General and administrative expense” and “Service expense” on our accompanying condensed consolidated statements of incomeoperations as summarized below:
|
| | | | | | | | | | | |
| | Three Months Ended June 30, 2018 |
| | As Previously Reported (1) | | Reclassifications | | As Reported |
| Service expense | $ | 324,126 |
| | $ | (6,385 | ) | | $ | 317,741 |
|
| General and administrative expense | 11,754 |
| | 6,385 |
| | 18,139 |
|
|
| | | | | | | | | | | |
| | Six Months Ended June 30, 2018 |
| | As Previously Reported (1) | | Reclassifications | | As Reported |
| Service expense | $ | 634,827 |
| | $ | (13,971 | ) | | $ | 620,856 |
|
| General and administrative expense | 22,066 |
| | 13,971 |
| | 36,037 |
|
(1) Adjusted for the three and nine months ended September 30, 2016. Seediscontinued operations, as described in Note 13, Discontinued Operations, for further information. See Note 2, Significant Accounting Policies and Recent Accounting Pronouncements, for additional information on other reclassifications.15.
2. Significant Accounting Policies and Recent Accounting Pronouncements
The Company adopted the following accounting pronouncements during the ninesix months ended SeptemberJune 30, 2017:2019:
In November 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”), which changes how deferred taxes are classified on organizations’ balance sheets. The ASU eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The amendments apply to all organizations that present a classified balance sheet. For public companies, the amendments are effective for financial statements issued for annual periods beginning after December 16, 2016, and interim periods within those annual periods. The Company adopted ASU 2015-17 retrospectively on January 1, 2017, which resulted in the reclassification of the December 31, 2016 deferred tax assets-current balance of $6,825 and non-current deferred tax assets of $2,493 to long-term deferred tax liabilities in the amount of $9,318.
In MarchFebruary 2016, the FASB issued ASU No. 2016-07, Investments - Equity Method and Joint Ventures2016-02, Leases (Topic 323): Simplifying the Transition to the Equity Method of Accounting842) (“ASU 2016-07”2016-02”). ASU 2016-07 eliminates2016-02 introduced FASB Accounting Standards Codification Topic 842 (“ASC 842”), which replaced ASC 840, Leases. In July 2018, the requirement that when an investment qualifies for useFASB issued ASU No. 2018-10, Codification Improvements to Topic 842 (Leases) (“ASU 2018-10”), which provides narrow amendments to clarify how to apply certain aspects of the equitynew lease standard. Additionally, in July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements (“ASU 2018-11”). ASU 2018-11 provides a new transition method and a practical expedient for separating components of a leasing contract.
The Company has not entered into significant lease agreements in which it is the lessor; however, the Company does have lease agreements in which it is the lessee. Under ASC 842, lessees are required to recognize a lease liability and right-of-use (“ROU”) asset for all leases (with the exception of short-term leases) at the lease commencement date. Effective January 1, 2019, the Company adopted this guidance, applied the modified retrospective transition method and elected the transition option to use the effective date as a resultthe date of an increase ininitial application. The Company recognized the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been incumulative effect during all previous periods that the investment had been held. ASU 2016-07 instead specifies that the investor should add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and applytransition adjustment on the equity method of accountingcondensed consolidated balance sheet as of the effective date and did not provide any new lease disclosures for periods before the investment became qualifiedeffective date. With respect to the practical expedients, the Company elected the package of transitional-related practical expedients and the practical expedient not to separate lease and non-lease components. At January 1, 2019, the Company recorded $23,165 and $24,491 of additional ROU leased assets and liabilities, respectively, on its condensed consolidated balance sheet. The adoption did not have a material impact on the statement of operations. See Note 9, Leases, for further information.
In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of stockholders’ equity method accounting.for interim financial statements. Under the amendments, an analysis of changes in each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. The Company adopted this new rule in the quarter ended March 31, 2019 by including the condensed consolidated statements of stockholders’ equity.
Recent accounting pronouncements that the Company has yet to adopt are as follows:
In June 2016, the FASB issued ASU 2016-07No. 2016-13, Financial Instruments - Credit Losses (Topic 326) (“ASU 2016-13”). The amendments in ASU 2016-13 will supersede or clarify much of the existing guidance for reporting credit losses for assets held at amortized cost basis and available for sale debt securities. The amendments in ASU 2016-13 affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2016-13 is effective for all entitiesfinancial statements
issued for fiscal years beginning after December 15, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018. The Company is currently evaluating the impact of ASU 2016-13 on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). ASU 2018-13 removes certain disclosures, modifies certain disclosures and added additional disclosures. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 and should2019, with early adoption permitted. ASU 2018-13 requires certain disclosures to be applied prospectively.on a retrospective basis and others on a prospective basis. The Company adopted ASU 2016-07 on January 1, 2017. The adoptionis currently evaluating the impact of ASU 2016-07 had no impact2018-13 on the Company’sits consolidated financial statements or disclosures.statements.
In March 2016,August 2018, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment2018-15, Intangibles-Goodwill and Other-Internal-Use Software: Customer’s Accounting (“ for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (“ASU 2016-09”2018-15”). ASU 2016-09 is intended to improve2018-15 will align the accountingrequirements for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including income tax consequences, classification of awards as either equity or liabilities and classification in the statement of cash flows. For public companies, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted ASU 2016-09 on January 1, 2017, and elected to recognize forfeitures as they occur. As a result, the Company recorded a cumulative effect adjustment of $850 to retained earnings as of January 1, 2017. Upon adoption, all excess tax benefits and tax deficiencies related to employee share-based payments are recognized through income tax expense prospectively. For the three and nine months ended September 30, 2017, the Company recorded excess tax deficiencies of $261 and $148, respectively, as an increase to the provision for income taxes. The Company excluded the related tax benefits when applying the treasury stock method for computing diluted shares outstanding on a prospective basis resultingcapitalizing implementation costs incurred in a decrease in diluted weighted average shares outstanding of 4,779 and 7,451 shares, respectively, for the three and nine months ended September 30, 2017.
The adoption of ASU 2016-09 subjects our tax rate to quarterly volatility from the effects of stock award exercises and vesting activities, including the adverse impact on our income tax provision for awards which result inhosting arrangement that is a tax deduction less than the amount recorded for financial reporting purposes based upon the fair value of the award at the grant date. For example, no shares will be distributed under the Company’s 2015 Holding Company LTI Program (the “HoldCo LTIP”) unless the volume weighted average of Providence’s stock price over a 90-day period ending on December 31, 2017 exceeds $56.79. If this market condition is not satisfied, a significant tax shortfall will result, causing an adverse impact on our tax provision.
The Company elected to apply the change in classification of cash flows resulting from excess tax benefits or deficiencies on a retrospective basis. This resulted in an increase in cash flows provided by operating activities of $276 and an increase of $276 in cash flows used in financing activities in the condensed consolidated statement of cash flows for the nine months ended September 30, 2016. Additionally, ASU 2016-09 requires that employee taxes paid when an employer withholds shares for tax-withholding purposes be reported as financing activities in the consolidated statements of cash flows, which is how the Company has historically classified these amounts.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805):Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01 clarifies the definition of a businessservice contract with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. ASU 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company adopted ASU 2017-01 on April 1, 2017. The adoption of ASU 2017-01 had no impact on the Company’s financial statements or disclosures.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350):Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step two of the goodwill impairment test. As a result, under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the impairment loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This guidance is effective prospectively for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. The Company adopted ASU 2017-04 on April 1, 2017. The adoption of ASU 2017-04 had no impact on the Company’s financial statements or disclosures.
Updates to the recent accounting pronouncements as disclosed in the Company’s Form 10-K for the year ended December 31, 2016 are as follows:
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 introduced FASB Accounting Standards Codification Topic 606 (“ASC 606”), which will replace most currently applicable existing revenue recognition guidance and is intended to improve and converge with international standards the financial reporting requirements for revenue from contracts with customers.capitalizing implementation costs incurred to develop or obtain internal-use software. The core principle of ASU 2014-09 is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. ASU 2014-09 also requires additional disclosures about the nature, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. ASU 2014-09 allows for adoption either on a full retrospective basis to each prior reporting period presented or on a modified retrospective basis with the cumulative effect of initially applying the new guidance recognized at the date of initial application, which will be effective for the Company beginning January 1, 2018.
The Company has developed an adoption plan, assembled a cross-functional project team and is in the process of assessing the impacts of applying ASC 606 to the Company’s financial statements, information systems and internal controls. The Company has elected to adopt ASU 2014-09 using the modified retrospective method. Additionally, the Company has performed detailed reviews of a significant number of its existing contracts with customers. These reviews have focused on several key considerations which could impact the Company's accounting and reporting under the new standard:
the effect of specified clauses on the term of many of the Company’s contracts with customers;
the nature of the promises in many of the Company’s contracts with customers to perform integrated services over a period of time;
whether and how much variable consideration to include when determining the transaction prices for its contracts with customers;
whether any of the Company’s customer contracts require performance over a series of distinct service periods and the impact on determining and allocating the transaction price; and
the manner in which the Company will measure its progress towards fully satisfying its performance obligations, including a determination of whether the Company may be able to use certain practical expedients.
These reviews are substantially complete for NET Services and are ongoing for WD Services. The Company expects little to no impact within NET Services from the adoption of ASU 2014-09, and is implementing controls and process changes needed to apply ASC 606. Within WD Services, the Company expects certain amounts of variable consideration related to contingent revenue will be accelerated. Such amounts were previously deferred until the final resolution of the contingency. Management’s assessment is ongoing; however, management does not believe the impact of ASC 606 on its financial statements will be significant based on the procedures performed to date.
In January 2017, the FASB issued ASU No. 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic323) (“ASU 2017-03”). ASU 2017-03 expands required qualitative disclosures when registrants cannot reasonably estimate the impact that adoption of an ASU will have on the financial statements. Such qualitative disclosures would include a comparison of the registrant’s new accounting policies, if determined, to current accounting policies, a description of the status of the registrant’s process to implement the new standard and a description of the significant implementation matters yet to be addressed by the registrant. Other than enhancements to the qualitative disclosures regarding future adoption of new ASUs, adoption of the provisions of this standard is not expected to have any impact on the Company’s consolidated financial statements.
In May 2017, the FASB issued ASU No. 2017-09, Compensation–Stock Compensation (Topic 718):Scope of Modification Accounting (“ASU 2017-09”). ASU 2017-09 provides guidance about which changes to the terms of a share-based payment award should be accounted for as a modification. A change to an award should be accounted for as a modification unless the fair value of the modified award is the same as the original award, the vesting conditions do not change, and the classification as an equity or liability instrument does not change. This guidance is effective for fiscal years beginning after December 15, 2017. Early2019, with early adoption is permitted. The adoptionCompany is currently evaluating the impact of ASU 2017-09 is not expected to have a material impact2018-15 on the Company’sits consolidated financial statements.
There were no other significant updates to the new accounting guidance not yet adopted by the Company as disclosed in its Form 10-K for the year ended December 31, 2016.
3. Revenue Recognition
Disaggregation of Revenue
The following table summarizes disaggregated revenue from contracts with customers by contract type for NET Services:
|
| | | | | | | |
| | Three months ended June 30, 2019 | | Three Months Ended June 30, 2018 |
| State Medicaid agency contracts | $ | 177,773 |
| | $ | 183,459 |
|
| Managed care organization contracts | 186,138 |
| | 160,277 |
|
| Total Service revenue, net | $ | 363,911 |
| | $ | 343,736 |
|
| | | | |
| Capitated contracts | $ | 308,690 |
| | $ | 286,994 |
|
| Non-capitated contracts | 55,221 |
| | 56,742 |
|
| Total Service revenue, net | $ | 363,911 |
| | $ | 343,736 |
|
|
| | | | | | | |
| | Six months ended June 30, 2019 | | Six months ended June 30, 2018 |
| State Medicaid agency contracts | $ | 354,741 |
| | $ | 360,748 |
|
| Managed care organization contracts | 376,985 |
| | 319,684 |
|
| Total Service revenue, net | $ | 731,726 |
| | $ | 680,432 |
|
| | | | |
| Capitated contracts | $ | 613,262 |
| | $ | 571,395 |
|
| Non-capitated contracts | 118,464 |
| | 109,037 |
|
| Total Service revenue, net | $ | 731,726 |
| | $ | 680,432 |
|
During the three months ended June 30, 2019 and 2018, NET Services recognized positive $236 and negative $1,007, respectively, from contractual adjustments relating to performance obligations satisfied in previous periods to which the customer agreed. During the six months ended June 30, 2019 and 2018, NET Services recognized negative $39 and positive $5,685, respectively, from contractual adjustments relating to performance obligations satisfied in previous periods to which the customer agreed.
Related Balance Sheet Accounts
The following table provides information about accounts receivable, net:
|
| | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| Accounts receivable | $ | 99,656 |
| | $ | 101,340 |
|
| NET Services’ reconciliation contract receivable | 57,328 |
| | 48,270 |
|
| Allowance for doubtful accounts | (2,120 | ) | | (1,854 | ) |
| | $ | 154,864 |
| | $ | 147,756 |
|
The following table provides information about other accounts included on the accompanying condensed consolidated balance sheets:
|
| | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
Accrued contract payments, included in “accrued expenses” | $ | 20,896 |
| | $ | 9,756 |
|
| Deferred revenue, current | 232 |
| | 562 |
|
Deferred revenue, long-term, included in “other long-term liabilities” | 860 |
| | 963 |
|
During the six months ended June 30, 2019 and 2018, $386 and $3,019 of deferred revenue as of December 31, 2018 and 2017, respectively, was recognized.
4. Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the amounts shown in the condensed consolidated statements of cash flows:
|
| | | | | | | |
| | June 30, 2019 | | June 30, 2018 |
| Cash and cash equivalents | $ | 29,804 |
| | $ | 29,700 |
|
| Restricted cash, current | 1,832 |
| | 1,868 |
|
| Current assets of discontinued operations | 889 |
| | 5,141 |
|
| Restricted cash, less current portion | 1,896 |
| | 3,260 |
|
| Cash, cash equivalents and restricted cash | $ | 34,421 |
| | $ | 39,969 |
|
Restricted cash primarily relates to amounts held in trusts for reinsurance claims losses under the Company’s captive insurance operation for historical workers’ compensation, general and professional liability and auto liability reinsurance programs, as well as amounts restricted for withdrawal under our self-insured medical and benefits plans. Current assets of discontinued operations principally reflect the cash position of WD Services operations in Saudi Arabia, which was not sold as part of the WD Services sale. Such cash will be used to fund the shut-down costs of this operation as needed. See Note 15, Discontinued Operations, for further information on the WD Services sale.
5. Equity Investment
Matrix
Prior to the closingAs of the Matrix Transaction on October 19, 2016, the financial results of Matrix were included in the Company’s HA Services segment. Subsequent to the closing of the Matrix Transaction,both June 30, 2019 and December 31, 2018, the Company owned a 46.8% noncontrolling interest in Matrix. As of September 30, 2017, the Company owned a 46.6% noncontrolling43.6% non-controlling interest in Matrix. Pursuant to a Shareholder’s Agreement,shareholder’s agreement, affiliates of Frazier Healthcare Partners hold rights necessary to control the fundamental operations of Matrix. The Company accounts for this investment in Matrix under the equity method of accounting andwith the Company’s share of Matrix’s income or losses are recorded as “Equity in net (gain) loss of investees”investee” in the accompanying condensed consolidated statements of income.operations.
The carrying amount of the assets included in the Company’s condensed consolidated balance sheetsheets and the maximum loss exposure related to the Company’s interest in Matrix as of SeptemberJune 30, 20172019 and December 31, 20162018 totaled $156,883$157,948 and $157,202,$161,503, respectively.
Summary financial information for Matrix on a standalone basis is as follows:
| | | | September 30, 2017 | | December 31, 2016 | June 30, 2019 | | December 31, 2018 |
| Current assets | $ | 50,015 |
| | $ | 28,589 |
| $ | 65,317 |
| | $ | 61,565 |
|
| Long-term assets | 598,842 |
| | 614,841 |
| 703,622 |
| | 719,450 |
|
| Current liabilities | 39,273 |
| | 25,791 |
| 26,226 |
| | 27,619 |
|
| Long-term liabilities | 270,816 |
| | 281,348 |
| 369,178 |
| | 373,159 |
|
8.10. Stock-Based Compensation and Similar Arrangements
The Company provides stock-based compensation to employees and non-employee directors under the Company’s 2006 Long-Term Incentive Plan (“2006 Plan”). Typical awards issued under this plan include stock option awards, restricted stock awards (“RSAs”) and performance based restricted stock units (“PRSUs”). In addition, the Company has a long-term incentive plan designed to provide long-term performance based awards to certain executive officers of the Company which also falls under the 2006 Plan.
The following table reflects the amount of stock-based compensation for continuing operations, for share settled awards, recorded in each financial statement line item for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016:2018:
|
| | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| General and administrative expense | $ | 1,289 |
| | $ | 3,345 |
| | 3,392 |
| | 4,273 |
|
| Equity in net loss of investee | — |
| | 102 |
| | — |
| | 161 |
|
| Total stock-based compensation | $ | 1,289 |
| | $ | 3,447 |
| | $ | 3,392 |
| | $ | 4,434 |
|
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Service expense | $ | 131 |
| | $ | 100 |
| | $ | 365 |
| | $ | 280 |
|
| General and administrative expense | 1,434 |
| | 1,135 |
| | 4,221 |
| | 2,858 |
|
| Equity in net loss of investees | 10 |
| | — |
| | 50 |
| | — |
|
| Discontinued operations, net of tax | — |
| | 22 |
| | — |
| | 66 |
|
| Total stock-based compensation | $ | 1,575 |
| | $ | 1,257 |
| | $ | 4,636 |
| | $ | 3,204 |
|
Stock-based compensation, for share settled awards, includes $1,014 and $3,098 for the three and nine months ended September 30, 2017, respectively, related to the HoldCo LTIP. Stock-based compensation, for share settled awards, includes $921 and $2,383 for the three and nine months ended September 30, 2016, respectively, related to the HoldCo LTIP. No shares will be distributed under the HoldCo LTIP unless the volume weighted average of Providence’s stock price over a 90-day period ending on December 31, 2017 is greater than $56.79.
At SeptemberJune 30, 2017,2019, the Company had 300,831615,301 stock options outstanding with a weighted-average exercise price of $37.97.$62.69. The Company also had 71,19351,799 shares of unvested RSAs outstanding at SeptemberJune 30, 20172019 with a weighted-average grant date fair value of $44.33$61.29.
Awards Granted to the Interim Chief Executive Officer
On February 1, 2019, the Company entered into an agreement for a base salary and 18,298 unvested PRSUs outstanding.the eligibility of a cash bonus with R. Carter Pate for his continued employment as the Company’s Interim CEO through December 31, 2019. In addition, the agreement granted Mr. Pate an award of 23,317 shares of restricted stock (the “Restricted Shares”), representing a value of $1,500 based on the closing price per share of the Company’s stock on the grant date. The Restricted Shares will vest if Mr. Pate remains employed with the Company through December 31, 2019. If the Company terminates Mr. Pate’s employment during 2019 because his services are no longer required, the Restricted Shares will vest and Mr. Pate will be entitled to the remaining unpaid portion of his 2019 base salary and payment of the 2019 bonus in an amount based on actual achievement of the performance measures. If a change in control of the Company occurs during 2019, the Restricted Shares will vest and Mr. Pate will be entitled to the remaining unpaid portion of his 2019 base salary and payment of the 2019 bonus at the target level.
Cash-Settled Awards
The Company also grants stock equivalent unit awards (“SEUs”) and stock option equivalent units that are cash settledcash-settled awards and are not included as part of the 2006 Plan. During the three and nine months ended SeptemberJune 30, 2017, respectively,2019 and June 30, 2018, the Company recorded $380$1,762 of stock-based compensation income and $1,611$1,795 of stock-based compensation expense for cash settled awards.cash-settled awards, respectively. During the three and ninesix months ended SeptemberJune 30, 2016, respectively,2019 and June 30, 2018, the Company recorded $422$573 of stock-based compensation income and $305$3,626 of stock-based compensation expense for cash settled awards.cash-settled awards, respectively. The expense and benefit for cash settledcash-settled awards is included as “General and administrative expense” in the accompanying condensed consolidated statements of income.operations. As the instruments are accounted for as liability awards, are cash settled, a significant amount of the income or expense recorded for the three and ninesix months ended SeptemberJune 30, 20172019 and 20162018 is almost entirely attributable to the Company’s increase or decreasechange in stock price from the previous reporting period. The liability for unexercised cash settledcash-settled share-based payment awards of $3,168$2,954 and $1,764$3,719 at SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively, areis reflected in “Accrued expenses” in the condensed consolidated balance sheets. At SeptemberJune 30, 2017,2019, the Company had 6,6714,234 SEUs and 200,000 stock option equivalent units outstanding.
TheLong-Term Incentive Plans
In connection with the acquisition of Circulation during 2018, the Company also provides cash settled long-termestablished a management incentive plans for executive management andplan (“MIP”) that is intended to motivate key employees of its operating segments.Circulation. During the three months ended June 30, 2017,March 31, 2019, the Company revisedMIP was amended to remove the structurepreviously included performance requirements and to provide for a total fixed payment of the NET Services long-term incentive plan. As a result, the Company finalized the amount payable under the plan at $2,956. The total value will be paid$12,000 to the awarded participants pergroup of MIP participants. The payout date is within 30 days following the terms of the original agreement and thus the remaining unamortized expense relating to this plan continues to be recognized over the remaining service period. As of September 30, 2017, unamortized compensation expense is $696. For the three and nine months ended September 30, 2017, expenses of $274 and $419, respectively, are included as “Service expense” in the condensed consolidated statements of income related to these plans. For the three and nine months ended September 30, 2016, $1,157 and $3,151, respectively, of expense are included as “Service expense” in the condensed consolidated statements of income related to these plans. At September 30, 2017, the liability for long-term incentive plansfinalization of the Company’s operating segments of $2,260 is reflected in “Accrued expenses” and “Other long-term liabilities” inaudited financial statements for the condensed consolidated balance sheet. Atfiscal year ending December 31, 2016,2021 and the liabilitypayout is subject to the participant remaining employed by the Company through December 31, 2021, except for long-term incentive planscertain termination scenarios. As of June 30, 2019 and December 31, 2018, the Company’s operating segments of $1,841 isCompany has accrued $2,808 and $1,441, respectively, related to the MIP and reflected in “Other long-term liabilities” in the condensed consolidated balance sheet.sheets.
9.
11. (Loss) Earnings Per Share
The following table details the computation of basic and diluted (loss) earnings per share:
|
| | | | | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| Numerator: | | | | | | | |
| Net loss attributable to Providence | $ | (1,712 | ) | | $ | (11,215 | ) | | $ | (1,129 | ) | | $ | (5,785 | ) |
| Less dividends on convertible preferred stock | (1,098 | ) | | (1,106 | ) | | (2,185 | ) | | (2,195 | ) |
| Less income allocated to participating securities | — |
| | — |
| | — |
| | — |
|
| Net loss available to common stockholders | $ | (2,810 | ) | | $ | (12,321 | ) | | $ | (3,314 | ) | | $ | (7,980 | ) |
| | | | | | | | |
| Continuing operations | $ | (4,507 | ) | | $ | 1,045 |
| | $ | (4,280 | ) | | $ | 7,083 |
|
| Discontinued operations | 1,697 |
| | (13,366 | ) | | 966 |
| | (15,063 | ) |
| Net loss available to common stockholders | $ | (2,810 | ) | | $ | (12,321 | ) | | $ | (3,314 | ) | | $ | (7,980 | ) |
| | | | | | | | |
| Denominator: | | | | | | | |
| Denominator for basic earnings per share -- weighted-average shares | 12,973,496 |
| | 13,008,106 |
| | 12,937,054 |
| | 13,056,765 |
|
| Effect of dilutive securities: | | | | | | | |
| Common stock options | — |
| | 80,076 |
| | — |
| | 84,433 |
|
| Denominator for diluted earnings per share -- adjusted weighted-average shares assumed conversion | 12,973,496 |
| | 13,088,182 |
| | 12,937,054 |
| | 13,141,198 |
|
| | | | | | | | |
| Basic (loss) earnings per share: | | | | | | | |
| Continuing operations | $ | (0.35 | ) | | $ | 0.08 |
| | $ | (0.33 | ) | | $ | 0.54 |
|
| Discontinued operations | 0.13 |
| | (1.03 | ) | | 0.07 |
| | (1.15 | ) |
| Basic loss per share | $ | (0.22 | ) | | $ | (0.95 | ) | | $ | (0.26 | ) | | $ | (0.61 | ) |
| Diluted (loss) earnings per share: | | | | | | | |
| Continuing operations | $ | (0.35 | ) | | $ | 0.08 |
| | $ | (0.33 | ) | | $ | 0.54 |
|
| Discontinued operations | 0.13 |
| | (1.02 | ) | | 0.07 |
| | (1.15 | ) |
| Diluted loss per share | $ | (0.22 | ) | | $ | (0.94 | ) | | $ | (0.26 | ) | | $ | (0.61 | ) |
|
| | | | | | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Numerator: | | | | | | | |
| Net income attributable to Providence | $ | 14,853 |
| | $ | 650 |
| | $ | 14,441 |
| | $ | 7,508 |
|
| Less dividends on convertible preferred stock | (1,114 | ) | | (1,111 | ) | | (3,305 | ) | | (3,309 | ) |
| Less income allocated to participating securities | (1,777 | ) | | (284 | ) | | (2,209 | ) | | (502 | ) |
| Net income (loss) available to common stockholders | $ | 11,962 |
| | $ | (745 | ) | | $ | 8,927 |
| | $ | 3,697 |
|
| | | | | | | | |
| Continuing operations | $ | 11,978 |
| | $ | 2,046 |
| | $ | 14,927 |
| | $ | 3,405 |
|
| Discontinued operations | (16 | ) | | (2,791 | ) | | (6,000 | ) | | 292 |
|
| | $ | 11,962 |
| | $ | (745 | ) | | $ | 8,927 |
| | $ | 3,697 |
|
| | | | | | | | |
| Denominator: | | | | | | | |
| Denominator for basic earnings per share -- weighted-average shares | 13,581,662 |
| | 14,523,408 |
| | 13,612,764 |
| | 14,823,757 |
|
| Effect of dilutive securities: | | | | | | | |
| Common stock options | 68,856 |
| | 111,075 |
| | 58,668 |
| | 119,267 |
|
| Performance-based restricted stock units | 5,036 |
| | — |
| | 5,036 |
| |
|
|
| Denominator for diluted earnings per share -- adjusted weighted-average shares assumed conversion | 13,655,554 |
| | 14,634,483 |
| | 13,676,468 |
| | 14,943,024 |
|
| | | | | | | | |
| Basic earnings (loss) per share: | | | | | | | |
| Continuing operations | $ | 0.88 |
| | $ | 0.14 |
| | $ | 1.10 |
| | $ | 0.23 |
|
| Discontinued operations | — |
| | (0.19 | ) | | (0.44 | ) | | 0.02 |
|
| | $ | 0.88 |
| | $ | (0.05 | ) | | $ | 0.66 |
| | $ | 0.25 |
|
| Diluted earnings (loss) per share: | | | | | | | |
| Continuing operations | $ | 0.88 |
| | $ | 0.14 |
| | $ | 1.09 |
| | $ | 0.23 |
|
| Discontinued operations | — |
| | (0.19 | ) | | (0.44 | ) | | 0.02 |
|
| | $ | 0.88 |
| | $ | (0.05 | ) | | $ | 0.65 |
| | $ | 0.25 |
|
Income allocated to participating securities is calculated by allocating a portion of net income attributable to Providence, less dividends on convertible stock, to the convertible preferred stockholders on a pro-rata, as converted basis; however, the convertible preferred stockholders are not allocated losses.
The following weighted averageweighted-average shares were not included in the computation of diluted earnings per share as the effect of their inclusion would have been anti-dilutive:
|
| | | | | |
| | Three months ended June 30, |
| | 2019 | | 2018 |
| Stock options to purchase common stock | 560,849 |
| | 386,721 |
|
| Convertible preferred stock | 801,391 |
| | 803,165 |
|
|
| | | | | | | | | | | |
| | Three months ended September 30, | | Nine months ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| Stock options to purchase common stock | 33,890 |
| | 33,957 |
| | 56,528 |
| | 33,957 |
|
| Convertible preferred stock | 803,285 |
| | 803,398 |
| | 803,360 |
| | 803,457 |
|
|
| | | | | |
| | Six months ended June 30, |
| | 2019 | | 2018 |
| Stock options to purchase common stock | 587,282 |
| | 238,806 |
|
| Convertible preferred stock | 801,498 |
| | 803,182 |
|
10.12. Income Taxes
The Company’s effective tax rate from continuing operations for the three and ninesix months ended SeptemberJune 30, 20172019 was 16.7%29.0% and 28.8%35.6%, respectively. The Company’s effective tax rate from continuing operations for the three and ninesix months ended SeptemberJune 30, 20162018 was 55.6%35.1% and 64.9%24.7%, respectively. Therespectively.These effective tax rates for the three and nine months ended September 30, 2016 exceededfrom continuing operations were higher than the U.S. federal statutory rate of 35%21.0% primarily due to foreign net operating losses (including equity investment losses in certain of the periods) for which the future income tax benefit currently cannot be recognized, losses in foreign jurisdictions with tax rates lower than the U.S. rate of 35%, state income taxes and certain non-deductible expenses. Foreign net operating losses for which no tax benefit can be provided were higherexpenses offset, in 2016 versus 2017 resulting in a decrease inpart, by the effective tax rate from 2016 to 2017. Additionally, for the three and nine months ended September 30, 2017, there was no provision for income taxes related to the gain on salefavorable impact of equity investment of $12,606 due to the substantial difference in tax basis versus book basis in the investment.stock option deductions.
The Company recorded excess tax deficiencies for the three and nine months ended September 30, 2017 of $261 and $148, respectively, which increased the provision for income taxes. These excess tax deficiencies were a result of applying the guidance in ASU 2016-09 as furtherAs discussed in Note 2, Significant Accounting Policies15, Discontinued Operations, the Company transferred its operations in Saudi Arabia to its contractual counterparties on January 1, 2019. In connection with the dissolution of its Saudi Arabia legal entity, the Company is protesting withholding tax and Recent Accounting Pronouncements.
The adoption of ASU 2016-09 subjects our tax rate to quarterly volatility from the effects of stock award exercises and vesting activities, including the adverse impact on our income tax provisionassessments for awards which result inthe years 2012 through 2017. The Company does not believe this will have a tax deduction less than the amount recorded formaterial adverse effect on its financial reporting purposes based upon the fair valuecondition or results of the award at the grant date. For example, no shares will be distributed under the HoldCo LTIP unless the volume weighted average of Providence’s stock price over a 90-day period ending on December 31, 2017 exceeds $56.79. If this market condition is not satisfied, a significant tax shortfall will result, causing an adverse impact on our tax provision.discontinued operations.
11.13. Commitments and Contingencies
Debt
Subsequent to June 30, 2019, the Company and certain of its subsidiaries entered into the Sixth Amendment to the Amended and Restated Credit and Guaranty Agreement (the “Amendment”), amending the Amended and Restated Credit and Guaranty Agreement dated as of August 2, 2013 (as amended to date, the “Credit Agreement”), by and among the Company, the guarantors from time to time party thereto, the lenders from time to time party thereto and Bank of America, N.A. as administrative agent. The Amendment extends the maturity date of the Credit Agreement to August 2, 2020. As of June 30, 2019, the Company had no amounts outstanding under the Credit Agreement.
Legal proceedings
On June 15, 2015, a putative stockholder class action derivative complaint was filed in the Court of Chancery of the State of Delaware (the “Court”), captioned Haverhill Retirement System v. Kerley et al., C.A. No. 11149-VCL (“Haverhill Litigation”).
On September 28, 2017, the Court approved a proposed settlement agreement among the parties that provides for a settlement amount of $10,000 less plaintiff’s legal fees and expenses (the “Settlement Amount”), with 75% of the Settlement Amount to be paid to the Company and 25% of the Settlement Amount to be paid to holders of the Company’s common stock other than certain excluded parties. The Company expects to receive a payment of approximately $5,000. As this amount is considered a gain contingency, the Company has not recorded a receivable for this amount as of September 30, 2017.
For further information regarding this legal proceeding please see Note 19, Commitments and Contingencies, in the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 and Note 11, Commitments and Contingencies, in the unaudited condensed consolidated financial statements included in the Company’s Quarterly Reports on Form 10-Q for the periods ended March 31, 2017 and June 30, 2017.
In addition to the matter described above, in the ordinary course of business, the Company is a party to various lawsuits. Management does not expect these lawsuits to have a material impact on the liquidity, results of operations, or financial condition of Providence.the Company.
Indemnifications relatedOn January 21, 2019, the United States District Court for the Southern District of Ohio unsealed a qui tam complaint, filed in December 2015, against Mobile Care Group, Inc., Mobile Care Group of Ohio, LLC, Mobile Care EMS & Transport, Inc. and LogistiCare Solutions, LLC (“LogistiCare”) by Brandee White, Laura Cunningham, and Jeffery Wisier (the “Relators”) alleging violations of the federal False Claims Act by presenting claims for payment to Haverhill Litigation
government healthcare programs knowing that the prerequisites for such claims to be paid had not been met. The Relators seek to recover damages, fees and costs under the federal False Claims Act including treble damages, civil penalties and attorneys’ fees. In addition, the Relators seek reinstatement to their jobs with the Mobile Care entities. None of the Relators was employed by LogistiCare. Prior to January 21, 2019, LogistiCare had no knowledge of the complaint. The federal government has declined to intervene against LogistiCare. The Company completedfiled a rights offeringmotion to dismiss the Complaint on February 5, 2015 (the “Rights Offering”) providing allApril 22, 2019, and believes that the case will not have a material adverse effect on its business, financial condition or results of the Company’s existing common stockholders the non-transferable right to purchase their pro rata share of $65,500 of convertible preferred stock at a price equal to $100.00 per share (“Preferred Stock”). Stockholders exercised subscription rights to purchase 130,884 shares of the Company's Preferred Stock. Pursuant to the terms and conditions of the Standby Purchase Agreement (the “Standby Purchase Agreement”) between Coliseum Capital Partners, L.P., Coliseum Capital Partners II, L.P., Coliseum Capital Co-Invest, L.P. and Blackwell Partners, LLC (collectively, the “Standby Purchasers”) and the Company, the remaining 524,116 shares of the Company’s Preferred Stock were purchased by the Standby Purchasers at the $100.00 per share subscription price. The Company has indemnified the Standby Purchasers from andoperations.
On March 1, 2019, Meher Patel filed suit against any and all losses, claims, damages, expenses and liabilities relating to or arising out of (i) any breach of any representation, warranty, covenant or undertaking made by or on behalf of the Company in the Standby Purchase AgreementSuperior Court of the State of California, Tuolumne County, on behalf of herself and (ii)as a class action on behalf of others similarly situated, asserting violations under the transactions contemplatedCalifornia Labor Code relating to the alleged failure by LogistiCare to comply with certain applicable state wage and related employment requirements, as well as claims of breach of contract and breach of the Standby Purchase Agreementimplied covenant of good faith and the 14.0% Unsecured Subordinated Note in aggregate principalfair dealing. The plaintiff seeks to recover an unspecified amount of $65,500, exceptdamages and penalties, as well as certification as a class action. No amounts have been accrued for any potential losses under this matter, as management cannot reasonably predict the outcome of the litigation or any potential losses. The Company intends to defend the extentlitigation vigorously and believes that any such losses, claims, damages, expenses and liabilities are attributable to the gross negligence, willful misconductcase will not have a material adverse effect on its business, financial condition or fraudresults of such Standby Purchaser.operations.
Indemnifications
The Company has also indemnified other third parties from and against any and all losses, claims, damages, expenses and liabilities arising out of or in connection with the Company’s acquisition of CCHN Group Holdings, Inc. (operating under the tradename Matrix, and formerly included in our HA Services segment) in October 2014 and related financing commitments, except to the extent that any such losses, claims, damages, expenses and liabilities are found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from the gross negligence, bad faith or willful misconduct of such third parties, or a material breach of such third parties’ obligations under the related agreements.
The Company recorded $21 and $296 of such indemnified legal expenses related to the Haverhill Litigation during the three and nine months ended September 30, 2017, respectively, and $791 and $935 of such indemnified legal expenses during the three and nine months ended September 30, 2016, respectively, which is included in “General and administrative expenses” in the condensed consolidated statements of income. Of these amounts, $23 and $231 for the three and nine months ended September 30, 2017, respectively, and $360 and $504 for the three and nine months ended September 30, 2016, respectively, were indemnified legal expenses of related parties. Other legal expenses of the Company related to the Haverhill Litigation are covered under the Company’s insurance policies, subject to applicable deductibles and customary review of the expenses by the carrier. The Company recognized related benefit of $3 and expense of $8 for the three and nine months ended September 30, 2017, respectively, and related expense of $107 for the three and nine months ended September 30, 2016. While the carrier typically remits payment directly to the respective law firm, the Company accrues for the cost and records a corresponding receivable for the amount to be paid by the carrier. The Company has recognized an insurance receivable of $903 and $1,645 in “Other receivables” in the condensed consolidated balance sheets at September 30, 2017 and December 31, 2016, respectively, with a corresponding liability amount recorded to “Accrued expenses”.
Other Indemnifications
The Company has provided certain standard indemnifications in connection with the sale of the Human Services segment to Molina Healthcare Inc. (“Molina”) effective November 1, 2015. AllCertain representations and warranties made by the Company in the related Membership Interest Purchase Agreement (the “Purchase Agreement”) to sell the Human Services segment ended on February 1, 2017. However, claims made prior to February 1, 2017 by the purchaser of the Human Services segment against these representations and warranties may survive until the claims are settled. In addition, certain representations, including tax representations, survive until the expiration of applicable statutes of limitation,limitation. Molina and healthcare representations survive until the third anniversary of the closing date. The Company received indications from the purchaser of the Human Services segment priorentered into a settlement agreement regarding indemnification claims by Molina with respect to the February 1, 2017 deadline regarding potential indemnification claims. One such potential indemnification claim relates to Rodriguez v. Providence Community Corrections (the “Rodriguez Litigation”), a complaint filed in the District Court for the Middle District of Tennessee, Nashville Division, (the “Rodriguez Court”), against Providence Community Corrections, Inc. (“PCC”), an entity sold under the Purchase Agreement. In September 2017, the parties to the Rodriguez Litigation submitted a proposed settlement to the Rodriguez Court for approval pursuant to which PCC would pay the plaintiffs approximately $14,000. In October 2017, the Rodriguez Court denied preliminary approval of the settlement agreement and requested that the parties provide additional information. In October 2017, the parties submitted an amended motion for the Rodriguez Court to approve the proposed settlement.
Molina and the Company have entered into a memorandum of understanding regarding a settlement of an indemnification claim by Molina with respect to the Rodriguez Litigation and other matters. As of September 30, 2017, the accrual is $15,000 with respect to an estimate of loss for potential indemnification claims. The Company expects to recover a substantial portion of the settlement through insurance coverage, although this cannot be assured.
The Company has provided certain standard indemnifications in connection with its Matrix stock subscription transaction whereby Mercury Fortuna Buyer, LLC (“Subscriber”), Providence and Matrix entered into a stock subscription agreement (the “Subscription Agreement”), dated August 28, 2016. The representations and warranties made by the Company in the Subscription Agreement survive through the 15th month following the closing date;ended January 19, 2018; however, certain fundamental representations survive through the 36th month following the closing date. The covenants and agreements of the parties to be performed prior to the closing survive through the 15th month following the closing date,ended January 19, 2018, and all other covenants and agreements survive until the expiration of the applicable statute of limitations in the event of a breach, or for such lesser periods specified therein. The Company is not aware of any indemnification liabilities with respect to Matrix that require accrual at SeptemberJune 30, 2017.2019.
Other Contingencies
On October 26, 2017, the UK Ministry of Justice (the “MOJ”) released a report on reoffending statistics for certain offenders who entered probation services during the period October 2015 to December 2015. The report provides statistics for all providers of probation services, including the Company’s subsidiary Reducing Reoffending Partnership (“RRP”). This information is the first data set that is utilized to determine performance payments under the various providers’ transforming rehabilitation contracts with the MOJ, as the actual rates of recidivism are compared to benchmark rates established by the MOJ. Across the industry, including for RRP, while certain rates of recidivism were less than the applicable benchmarks, other rates exceeded the benchmarks established by the MOJ. If such rates of recidivism were to continue to exceed the benchmark rates established by the MOJ, RRP could be required to make payments to the MOJ, which amounts could be material. The amount of potential payments to the MOJ, if any, under RRP’s contracts with the MOJ is not estimable at this time, as the MOJ is reviewing the data to understand the underlying reasons for the increase in certain rates of recidivism and other factors that could impact the contractual measure.
Loss Reserves for Certain Reinsurance Programs
The Company historically reinsured a substantial portion of its automobile, general and professional liability and workers’ compensation costs under reinsurance programs through the Company’s wholly-owned subsidiary, Social Services Providers Captive Insurance Company (“SPCIC”), a licensed captive insurance company domiciled in the State of Arizona. As of May 16, 2017, SPCIC did not renew the expiring reinsurance policies. SPCIC will continue to resolve claims under the historical policy years.
The Company utilizes a report prepared by an independent actuary to estimate the gross expected losses related to historical automobile, general and professional and workers’ compensation liability reinsurance policies, including the estimated losses in excess of SPCIC’s insurance limits, which would be reimbursed to SPCIC to the extent such losses were incurred. As of September 30, 2017 and December 31, 2016, the Company had reserves of $8,309 and $11,195, respectively, for the automobile, general and professional liability and workers’ compensation reinsurance policies, net of expected receivables for losses in excess of SPCIC’s historical insurance limits. The gross reserve as of September 30, 2017 and December 31, 2016 of $14,407 and $16,460, respectively, is classified as “Reinsurance liability reserves” and “Other long-term liabilities” in the condensed consolidated balance sheets. The estimated amount to be reimbursed to SPCIC as of September 30, 2017 and December 31, 2016 was $6,098 and $5,265, respectively, and is classified as “Other receivables" and “Other assets” in the condensed consolidated balance sheets.
Deferred Compensation Plan
The Company has one deferred compensation planprovided certain standard indemnifications in connection with the sale of substantially all of its WD Services segment to Advanced Personnel Management Global Pty Ltd of Australia (“APM”), which closed on December 21, 2018. The non-title warranties made by the Company in the related Share Purchase Agreement survive for highly compensated employees18 months following the closing date, and the title-related warranties and tax warranties survive five years from the closing date. The Company is not aware of NETany indemnification liabilities with respect to the former WD Services segment that require accrual at June 30, 2019.
On May 9, 2018, the Company entered into a registration indemnification agreement with Coliseum Capital Partners, L.P., Coliseum Capital Partners II, L.P., Blackwell Partners, LLC - Series A and Coliseum Capital Co-Invest, L.P. (collectively, the “Coliseum Stockholders”), who as of SeptemberJune 30, 2017. The deferred compensation plan is unfunded, and benefits are paid from the general assets2019 collectively held approximately 9.4% of the Company. The totalCompany’s outstanding common stock and approximately 95.7% of participant deferrals,the Company’s outstanding Preferred Stock, pursuant to which is reflected in “Other long-term liabilities” in the condensed consolidated balance sheets, was $1,718Company has agreed to indemnify the Coliseum Stockholders, and $1,430 at September 30, 2017 and December 31, 2016, respectively.the Coliseum Stockholders have agreed to indemnify the Company, against certain matters relating to the registration of the selling stockholders’ securities for resale under the Securities Act of 1933, as amended (the “Securities Act”).
12.14. Transactions with Related Parties
The Company incurred legal expenses under an indemnification agreement with the Standby Purchasers as further discussed in Note 11, Commitments and Contingencies. Convertible preferred stock dividends earned by the Standby PurchasersColiseum Stockholders during the three and nine months ended SeptemberJune 30, 20172019 and 2018 totaled $1,062 and $3,151, respectively.$1,050 in both periods. Convertible preferred stock dividends earned by the Standby PurchasersColiseum Stockholders during the three and ninesix months ended SeptemberJune 30, 20162019 and 2018 totaled $1,059 and $3,154, respectively.$2,089 in both periods.
During the three months ended March 31, 2017, the Company made a $566 loan to Mission Providence. The loan was repaid during the three months ended September 30, 2017.
13.15. Discontinued Operations
On December 21, 2018, the Company completed the sale of substantially all of the operating subsidiaries of its WD Services segment to APM and APM UK Holdings Limited, an affiliate of APM, except for the segment’s employment services operations in Saudi Arabia. The Company’s contractual counterparties in Saudi Arabia, including an entity owned by the Saudi Arabian government, assumed these operations beginning January 1, 2019.
On June 11, 2018, the Company entered into a Share Purchase Agreement to sell the shares of Ingeus France, its WD Services operation in France, for a de minimis amount. The sale was effective on July 17, 2018.
On November 1, 2015, the Company completed the sale of theits Human Services segment. During the three and ninesix months ended SeptemberJune 30, 2017,2019 and 2018, the Company recorded additional expenses related to the Human Services segment, principally related to previously disclosed legal proceedings as described in Note 11, Commitments and Contingencies, related to an indemnified legal matter.proceedings.
Effective October 19, 2016, the Company completed the Matrix Transaction. Prior to the closing of the Matrix Transaction, the financial results of Matrix were included in the Company’s HA Services segment, which has been reflected as a discontinued operation for the three and nine months ended September 30, 2016. Following the Matrix Transaction, the Company has a continuing involvement with Matrix through its ownership interest in Matrix, which is accounted for as an equity method investment. As of September 30, 2017, the Company holds a 46.6% ownership interest in Matrix. Matrix’s pretax loss for the three and nine months ended September 30, 2017 totaled $582 and $896, respectively. There have been no cash inflows or outflows from or to Matrix subsequent to the closing of the Matrix Transaction, other than the payment of working capital adjustments and management fees associated with its ongoing relationship with Matrix, of which $841 was received during the nine months ended September 30, 2017. $259 and $185 are included in “Other receivables” in the condensed consolidated balance sheets at September 30, 2017 and December 31, 2016, respectively, related to management fees receivable.
Results of Operations
The following tables summarize the results of operations classified as discontinued operations, net of tax, for the three and ninesix months ended SeptemberJune 30, 20172019 and 2016.2018:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2017 | | Nine months ended September 30, 2017 |
| | Human Services Segment | | HA Services Segment | | Total Discontinued Operations | | Human Services Segment | | HA Services Segment | | Total Discontinued Operations |
| | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | |
| General and administrative expense | $ | 26 |
| | $ | — |
| | $ | 26 |
| | $ | 9,622 |
| | $ | — |
| | $ | 9,622 |
|
| Total operating expenses | 26 |
| | — |
| | 26 |
| | 9,622 |
| | — |
| | 9,622 |
|
| Loss from discontinued operations before income taxes | (26 | ) | | — |
| | (26 | ) | | (9,622 | ) | | — |
| | (9,622 | ) |
| Income tax benefit | 10 |
| | — |
| | 10 |
| | 3,622 |
| | — |
| | 3,622 |
|
| Discontinued operations, net of tax | $ | (16 | ) | | $ | — |
| | $ | (16 | ) | | $ | (6,000 | ) | | $ | — |
| | $ | (6,000 | ) |
|
| | | | | | | | | | | |
| | Three Months Ended June 30, 2019 |
| | Human Services
Segment | | WD Services
Segment | | Total Discontinued
Operations |
| Operating expenses: | |
| General and administrative expense (income) | $ | 72 |
| | $ | (2,805 | ) | | $ | (2,733 | ) |
| Total operating expense (income) | 72 |
| | (2,805 | ) | | (2,733 | ) |
| Operating (loss) income | (72 | ) | | 2,805 |
| | 2,733 |
|
| | | | | | |
| (Loss) income from discontinued operations before income taxes | (72 | ) | | 2,805 |
| | 2,733 |
|
| Benefit (provision) for income taxes | 17 |
| | (1,053 | ) | | (1,036 | ) |
| (Loss) income from discontinued operations, net of tax | $ | (55 | ) | | $ | 1,752 |
| | $ | 1,697 |
|
General |
| | | | | | | | | | | |
| | Six Months Ended June 30, 2019 |
| | Human Services
Segment | | WD Services
Segment | | Total Discontinued
Operations |
| Operating expenses: | |
| General and administrative expense (income) | $ | 217 |
| | $ | (2,097 | ) | | $ | (1,880 | ) |
| Total operating expense (income) | 217 |
| | (2,097 | ) | | (1,880 | ) |
| Operating (loss) income | (217 | ) | | 2,097 |
| | 1,880 |
|
| | | | | | |
| (Loss) income from discontinued operations before income taxes | (217 | ) | | 2,097 |
| | 1,880 |
|
| Benefit (provision) for income taxes | 53 |
| | (967 | ) | | (914 | ) |
| (Loss) income from discontinued operations, net of tax | $ | (164 | ) | | $ | 1,130 |
| | $ | 966 |
|
|
| | | | | | | | | | | |
| | Three Months Ended June 30, 2018 |
| | Human Services
Segment | | WD Services
Segment | | Total Discontinued
Operations |
| Service revenue, net | $ | — |
| | $ | 68,058 |
| | $ | 68,058 |
|
| | | | | | |
| Operating expenses: | |
| Service expense | — |
| | 60,944 |
| | 60,944 |
|
| General and administrative expense | 65 |
| | 7,524 |
| | 7,589 |
|
| Asset impairment charge | — |
| | 9,203 |
| | 9,203 |
|
| Depreciation and amortization | — |
| | 3,131 |
| | 3,131 |
|
| Total operating expenses | 65 |
| | 80,802 |
| | 80,867 |
|
| Operating loss | (65 | ) | | (12,744 | ) | | (12,809 | ) |
| | | | | | |
| Other income (expense): | | | | | |
| Interest expense, net | — |
| | (13 | ) | | (13 | ) |
| Gain on foreign currency transactions | — |
| | 6 |
| | 6 |
|
| Equity in net gain of investee | — |
| | 27 |
| | 27 |
|
| Loss from discontinued operations before income taxes | (65 | ) | | (12,724 | ) | | (12,789 | ) |
| Benefit (provision) for income taxes | 16 |
| | (593 | ) | | (577 | ) |
| Loss from discontinued operations, net of tax | $ | (49 | ) | | $ | (13,317 | ) | | $ | (13,366 | ) |
|
| | | | | | | | | | | |
| | Six Months Ended June 30, 2018 |
| | Human Services
Segment | | WD Services
Segment | | Total Discontinued
Operations |
| Service revenue, net | $ | — |
|
| $ | 137,408 |
|
| $ | 137,408 |
|
| | | | | | |
| Operating expenses: | |
| Service expense | — |
| | 121,479 |
| | 121,479 |
|
| General and administrative expense | 76 |
| | 15,626 |
| | 15,702 |
|
| Asset impairment charge | — |
| | 9,203 |
| | 9,203 |
|
| Depreciation and amortization | — |
| | 6,349 |
| | 6,349 |
|
| Total operating expenses | 76 |
| | 152,657 |
| | 152,733 |
|
| Operating loss | (76 | ) | | (15,249 | ) | | (15,325 | ) |
| | | | | | |
| Other income (expense): | | | | | |
| Interest expense, net | — |
| | (12 | ) | | (12 | ) |
| Gain on foreign currency transactions | — |
| | 630 |
| | 630 |
|
| Equity in net gain of investee | — |
| | 51 |
| | 51 |
|
| Loss from discontinued operations before income taxes | (76 | ) | | (14,580 | ) | | (14,656 | ) |
| Benefit (provision) for income taxes | 19 |
| | (426 | ) | | (407 | ) |
| Loss from discontinued operations, net of tax | $ | (57 | ) | | $ | (15,006 | ) | | $ | (15,063 | ) |
Assets and administrative expenses forliabilities
The following table summarizes the three months ended September 30, 2017 includes legal expenses of $26. General and administrative expenses for the nine months ended September 30, 2017 includes an accrual of $9,000 for an estimated settlement of indemnified claims related to the salecarrying amounts of the Human Services segment, as well as related legal expensesmajor classes of $622. See Note 11, Commitmentsassets and Contingencies, for additional information.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | Three months ended September 30, 2016 | | Nine months ended September 30, 2016 |
| | Human Services Segment | | HA Services Segment | | Total Discontinued Operations | | Human Services Segment | | HA Services Segment | | Total Discontinued Operations |
| | | | | | | | | | | | |
| Service revenue, net | $ | — |
| | $ | 52,557 |
| | $ | 52,557 |
| | $ | — |
| | $ | 155,421 |
| | $ | 155,421 |
|
| | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | |
| Service expense | — |
| | 38,703 |
| | 38,703 |
| | — |
| | 113,455 |
| | 113,455 |
|
| General and administrative expense | 7,463 |
| | 1,505 |
| | 8,968 |
| | 7,463 |
| | 2,823 |
| | 10,286 |
|
| Depreciation and amortization | — |
| | 5,359 |
| | 5,359 |
| | — |
| | 21,121 |
| | 21,121 |
|
| Total operating expenses | 7,463 |
| | 45,567 |
| | 53,030 |
| | 7,463 |
| | 137,399 |
| | 144,862 |
|
| Operating income (loss) | (7,463 | ) | | 6,990 |
| | (473 | ) | | (7,463 | ) | | 18,022 |
| | 10,559 |
|
| | | | | | | | | | | | |
| Other expenses: | | | | | | | | | | | |
| Interest expense, net | — |
| | 3,134 |
| | 3,134 |
| | — |
| | 9,304 |
| | 9,304 |
|
| Income (loss) from discontinued operations before income taxes | (7,463 | ) | | 3,856 |
| | (3,607 | ) | | (7,463 | ) | | 8,718 |
| | 1,255 |
|
| Income tax benefit (provision) | 2,428 |
| | (1,612 | ) | | 816 |
| | 2,428 |
| | (3,351 | ) | | (923 | ) |
| Discontinued operations, net of tax | $ | (5,035 | ) | | $ | 2,244 |
| | $ | (2,791 | ) | | $ | (5,035 | ) | | $ | 5,367 |
| | $ | 332 |
|
Interest expense, net
The Company allocated interest expense, including amortizationliabilities of deferred financing fees, to discontinued operations based on the portion of debt that was required to be repaid with the proceeds from the Matrix Transaction. The total allocated interest expense was $3,136 and $9,310 for the three and nine months ended September 30, 2016 respectively, and is included in “Interest expense, net” in the table above.condensed consolidated balance sheets as of June 30, 2019 and December 31, 2018. Amounts represent the accounts of WD Services operations in Saudi Arabia, which were not sold as part of the WD Services sale.
|
| | | | | | | |
| | June 30, | | December 31, |
| | 2019 | | 2018 |
| Cash and cash equivalents | $ | 889 |
| | $ | 2,321 |
|
| Accounts receivable, net of allowance of $0 in 2019 and $3,460 in 2018 | 3,467 |
| | 4,316 |
|
| Prepaid expenses and other | (175 | ) | | 414 |
|
| Current assets of discontinued operations | $ | 4,181 |
| | $ | 7,051 |
|
| | | | |
| Accounts payable | $ | 166 |
| | $ | 486 |
|
| Accrued expenses | 1,114 |
| | 2,771 |
|
| Current liabilities of discontinued operations | $ | 1,280 |
| | $ | 3,257 |
|
| | | | |
| Deferred tax liabilities | $ | 713 |
| | $ | — |
|
| Noncurrent liabilities of discontinued operations | $ | 713 |
| | $ | — |
|
Cash Flow Information
The following table presents depreciation, amortization and capital expenditurescash flow information of the discontinued operations for the ninesix months ended SeptemberJune 30, 2016:2019 and 2018:
|
| | | |
| | Nine months ended September 30, 2016 |
| | |
| Cash flows from discontinued operating activities: | |
| Depreciation | $ | 3,661 |
|
| Amortization | $ | 17,460 |
|
| | |
| Cash flows from discontinued investing activities: | |
| Purchase of property and equipment | $ | 8,020 |
|
|
| | | |
| | Six Months Ended June 30, 2019 |
| | WD Services Segment |
| Cash flow information from discontinued operating activities: | |
| Deferred income taxes | $ | 646 |
|
|
| | | |
| | Six Months Ended June 30, 2018 |
| | WD Services Segment |
| Cash flow information from discontinued operating activities: | |
| Depreciation | $ | 3,697 |
|
| Amortization | 2,652 |
|
| Stock-based compensation | 6 |
|
| Deferred income taxes | (2,175 | ) |
| Cash flows from discontinued investing activities: | |
| Purchase of property and equipment | $ | 3,198 |
|
14.16. Segments
Providence, through its subsidiaries and other companies in which it holds interests, is primarily engaged in the provision of healthcare and workforce development services. The subsidiaries and other companies in whichEffective January 1, 2019, the Company holds interests comprisesubstantially completed its Organizational Consolidation changing from a holding company that previously owned a portfolio of companies to an operating company structure that provides NET services and has an investment in Matrix. As a result, beginning January 1, 2019, the following segments:Company’s chief operating decision maker reviews financial performance and allocates resources based on two segments as follows:
NET Services – Nationwide provider- which operates primarily under the brands LogistiCare and Circulation, is the largest manager of non-emergency medical transportationNET programs for state governments and managed care organizations.MCOs in the U.S and includes the Company’s activities for executive, accounting, finance, internal audit, tax, legal, certain strategic and development functions and the Company’s captive insurance company.
WD Services – Global provider of employment preparation and placement and legal offender rehabilitation services to eligible participants of government sponsored programs.
Matrix Investment – Minority interest- which consists of a minority investment in Matrix, a nationwide provider of in-homehome and mobile-based healthcare services for health plans in the U.S., including CHAs, quality gap closure visits, “level of service” needs assessments, and post-acute and chronic care optimizationmanagement, providing such services through a network of community-based clinicians, and management solutions, including comprehensivea fleet of mobile health assessments,clinics with advanced diagnostics capabilities.
We have reclassified prior period segment amounts to members of managed care organizations, accounted for as an equity method investment.
Effective October 19, 2016, pursuantconform to the Matrix Transaction, the Company no longer owns a controlling interest in Matrix,current presentation, which historically constituted the HA Services segmentare summarized as further discussedfollows:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2018 |
| | As Previously Reported (1) | | Segment Reclassification | | Other Reclassification (Note 1) | | As Reported |
General and administrative : | | | | | | |
|
|
| NET Services | $ | 2,770 |
| | $ | 8,984 |
| | $ | 6,385 |
| | $ | 18,139 |
|
| Corporate and Other | 8,984 |
| | (8,984 | ) | | — |
| | — |
|
| Depreciation and amortization: | | | | | | |
|
|
| NET Services | 3,511 |
| | 236 |
| | — |
| | 3,747 |
|
| Corporate and Other | 236 |
| | (236 | ) | | — |
| | — |
|
Operating income (loss): | | | | | | | |
| NET Services | 12,379 |
| | (8,948 | ) | | — |
| | 3,431 |
|
| Corporate and Other | (8,948 | ) | | 8,948 |
| | — |
| | — |
|
(1) Adjusted for discontinued operations, as described in Note 13, Discontinued Operations. As the HA Services segment, through October 19, 2016, is presented as a discontinued operation, it is not reflected in the Company’s segment disclosures. However, the Company accounts for its noncontrolling interest in Matrix from October 19, 2016 through present as an equity method investment, which solely comprises the Matrix Investment in the table below.15.
|
| | | | | | | | | | | | | | | |
| | Six Months Ended June 30, 2018 |
| | As Previously Reported (1) | | Segment Reclassification | | Other Reclassification (Note 1) | | As Reported |
| General and administrative: | | | | | | | |
| NET Services | $ | 5,218 |
| | $ | 16,848 |
| | $ | 13,971 |
| | $ | 36,037 |
|
| Corporate and Other | 16,848 |
| | (16,848 | ) | | — |
| | — |
|
| Depreciation and amortization: | | | | | | | |
| NET Services | 7,005 |
| | 322 |
| | — |
| | 7,327 |
|
| Corporate and Other | 322 |
| | (322 | ) | | — |
| | — |
|
| Operating income (loss): | | | | | | | |
| NET Services | 32,433 |
| | (16,899 | ) | | — |
| | 15,534 |
|
| Corporate and Other | (16,899 | ) | | 16,899 |
| | — |
| | — |
|
The following tables set forth certain financial information from continuing operations attributable to the Company’s business segments for the three and nine months ended September 30, 2017 and 2016:segments:
| | | | Three months ended September 30, 2017 | Three months ended June 30, 2019 |
| | NET Services | | WD Services | | Matrix Investment | | Corporate and Other | | Total | NET Services | | Matrix Investment | | Total |
| Service revenue, net | $ | 324,824 |
| | $ | 84,693 |
| | $ | — |
| | $ | — |
| | $ | 409,517 |
| $ | 363,911 |
| | $ | — |
| | $ | 363,911 |
|
| Service expense | 304,454 |
| | 73,581 |
| | — |
| | (3 | ) | | 378,032 |
| 345,948 |
| | — |
| | 345,948 |
|
| General and administrative expense | 2,899 |
| | 6,980 |
| | — |
| | 8,750 |
| | 18,629 |
| 16,860 |
| | — |
| | 16,860 |
|
| Depreciation and amortization | 3,286 |
| | 3,166 |
| | — |
| | 95 |
| | 6,547 |
| 4,353 |
| | — |
| | 4,353 |
|
| Operating income (loss) | $ | 14,185 |
| | $ | 966 |
| | $ | — |
| | $ | (8,842 | ) | | $ | 6,309 |
| |
| Operating loss | | $ | (3,250 | ) | | $ | — |
| | $ | (3,250 | ) |
| | | | | | | | | | | | | | | |
| Equity in net gain (loss) of investee | $ | — |
| | $ | (459 | ) | | $ | (1 | ) | | $ | — |
| | $ | (460 | ) | |
| Equity in net loss of investee | | $ | — |
| | $ | (1,315 | ) | | $ | (1,315 | ) |
| | | | | | | |
| | | June 30, 2019 |
| Total assets (continuing operations) | | $ | 443,703 |
| | $ | 157,948 |
| | $ | 601,651 |
|
| | | | Three months ended September 30, 2016 | Six Months Ended June 30, 2019 |
| | NET Services | | WD Services | | Matrix Investment | | Corporate and Other | | Total | NET Services | | Matrix
Investment | | Total |
| Service revenue, net | $ | 317,280 |
| | $ | 94,960 |
| | $ | — |
| | $ | 31 |
| | $ | 412,271 |
| $ | 731,726 |
| | $ | — |
| | $ | 731,726 |
|
| Service expense | 293,919 |
| | 84,051 |
| | — |
| | 518 |
| | 378,488 |
| 686,446 |
| | — |
| | 686,446 |
|
| General and administrative expense | 2,860 |
| | 6,780 |
| | — |
| | 7,680 |
| | 17,320 |
| 36,262 |
| | — |
| | 36,262 |
|
| Depreciation and amortization | 3,051 |
| | 3,497 |
| | — |
| | 122 |
| | 6,670 |
| 8,827 |
| | — |
| | 8,827 |
|
| Operating income (loss) | $ | 17,450 |
| | $ | 632 |
| | $ | — |
| | $ | (8,289 | ) | | $ | 9,793 |
| |
| Operating income | | $ | 191 |
| | $ | — |
| | $ | 191 |
|
| | | | | | | | | | | | | | | |
| Equity in net gain (loss) of investee | $ | — |
| | $ | (1,517 | ) | | $ | — |
| | $ | — |
| | $ | (1,517 | ) | |
| Equity in net loss of investee | | $ | — |
| | $ | (2,971 | ) | | $ | (2,971 | ) |
|
| | | | | | | | | | | |
| | Three months ended June 30, 2018 |
| | NET Services | | Matrix Investment | | Total |
| Service revenue, net | $ | 343,736 |
| | $ | — |
| | $ | 343,736 |
|
| Service expense | 317,741 |
| | — |
| | 317,741 |
|
| General and administrative expense | 18,139 |
| | — |
| | 18,139 |
|
| Asset impairment charge | 678 |
| | — |
| | 678 |
|
| Depreciation and amortization | 3,747 |
| | — |
| | 3,747 |
|
| Operating income | $ | 3,431 |
| | $ | — |
| | $ | 3,431 |
|
| | | | | | |
| Equity in net loss of investee | $ | — |
| | $ | (174 | ) | | $ | (174 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2017 |
| | NET Services | | WD Services | | Matrix Investment | | Corporate and Other | | Total |
| Service revenue, net | $ | 987,662 |
| | $ | 229,332 |
| | $ | — |
| | $ | — |
| | $ | 1,216,994 |
|
| Service expense | 927,082 |
| | 199,665 |
| | — |
| | (2,269 | ) | | 1,124,478 |
|
| General and administrative expense | 8,879 |
| | 20,944 |
| | — |
| | 23,882 |
| | 53,705 |
|
| Depreciation and amortization | 9,763 |
| | 9,695 |
| | — |
| | 258 |
| | 19,716 |
|
| Operating income (loss) | $ | 41,938 |
| | $ | (972 | ) | | $ | — |
| | $ | (21,871 | ) | | $ | 19,095 |
|
| | | | | | | | | | |
| Equity in net gain (loss) of investee | $ | — |
| | $ | (1,419 | ) | | $ | 428 |
| | $ | — |
| | $ | (991 | ) |
|
| | | | | | | | | | | |
| | Six Months Ended June 30, 2018 |
| | NET Services | | Matrix
Investment | | Total |
| Service revenue, net | $ | 680,432 |
| | $ | — |
| | $ | 680,432 |
|
| Service expense | 620,856 |
| | — |
| | 620,856 |
|
| General and administrative expense | 36,037 |
| | — |
| | 36,037 |
|
| Asset impairment charge | 678 |
| | — |
| | 678 |
|
| Depreciation and amortization | 7,327 |
| | — |
| | 7,327 |
|
| Operating income | $ | 15,534 |
| | $ | — |
| | $ | 15,534 |
|
| | | | | | |
| Equity in net loss of investee | $ | — |
| | $ | (2,519 | ) | | $ | (2,519 | ) |
|
| | | | | | | | | | | | | | | | | | | |
| | Nine months ended September 30, 2016 |
| | NET Services | | WD Services | | Matrix Investment | | Corporate and Other | | Total |
| Service revenue, net | $ | 917,157 |
| | $ | 275,293 |
| | $ | — |
| | $ | (24 | ) | | $ | 1,192,426 |
|
| Service expense | 846,311 |
| | 247,797 |
| | — |
| | 903 |
| | 1,095,011 |
|
| General and administrative expense | 8,483 |
| | 23,236 |
| | — |
| | 20,829 |
| | 52,548 |
|
| Depreciation and amortization | 8,858 |
| | 10,912 |
| | — |
| | 288 |
| | 20,058 |
|
| Operating income (loss) | $ | 53,505 |
| | $ | (6,652 | ) | | $ | — |
| | $ | (22,044 | ) | | $ | 24,809 |
|
| | | | | | | | | | |
| Equity in net gain (loss) of investee | $ | — |
| | $ | (5,693 | ) | | $ | — |
| | $ | — |
| | $ | (5,693 | ) |
Geographic Information
Domestic service revenue, net, totaled 82.1% and 78.0% of service revenue, net for the nine months ended September 30, 2017 and 2016, respectively. Foreign service revenue, net, totaled 17.9% and 22.0% of service revenue, net for the nine months ended September 30, 2017 and 2016, respectively.
At September 30, 2017 and December 31, 2016, $99,352, or 26.0%, and $76,579, or 20.4%, respectively, of the Company’s net assets were located in countries outside of the U.S., including $15,823 of proceeds realized on the sale of the equity investment in Mission Providence.
On November 2, 2017, the Company’s Board of Directors approved the extension of the Company’s existing stock repurchase program, authorizing the Company to engage in a common stock repurchase program to repurchase up to $69,624 (the amount remaining from the $100,000 repurchase amount authorized in 2016) in aggregate value of the Company’s common stock through December 31, 2018. Purchases under the common stock repurchase program may be made from time-to-time through a combination of open market repurchases (including Rule 10b5-1 plans), privately negotiated transactions, and accelerated share repurchase transactions, at the discretion of the Company’s officers, and as permitted by securities laws, covenants under existing bank agreements, and other legal requirements.
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 ninesix months ended SeptemberJune 30, 20172019 and 2016,2018, 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, 2016.2018. For purposes of “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” references to Q3 2017Q2 2019 and Q3 2016Q2 2018 mean the three months ended SeptemberJune 30, 20172019 and the three months ended SeptemberJune 30, 2016,2018, respectively, and references to YTD 20172019 and YTD 20162018 mean the ninesix months ended SeptemberJune 30, 20172019 and the ninesix months ended SeptemberJune 30, 2016,2018, respectively.
Overview of our businessOur Business
Providence, through its subsidiariesWe own a subsidiary and other companies in which it holds interests, isan investment primarily engaged in the provision of healthcare services in the United States. The Company’s NET Services segment, whichprimarily operates under the brands LogistiCare and workforce development services. The subsidiaries and other companies in which we hold interests compriseCirculation, is the following segments:
Non-Emergency Transportation Services (“NET Services”) – Nationwide providerlargest manager of non-emergency medical transportation (“NET”) programs for state governments and managed care organizations.organizations (“MCOs”) in the United States (“U.S.”). In addition, the NET Services segment now includes the Company’s activities related to executive, accounting, finance, internal audit, tax, legal, certain strategic and corporate development functions and the results of the Company’s captive insurance company. During 2018, the Company announced an Organizational Consolidation plan (“Organizational Consolidation”) to integrate substantially all activities and functions performed at the corporate holding company level into its wholly-owned subsidiary, LogistiCare Solutions LLC ("LogistiCare"). Effective January 1, 2019, the consolidation was substantially complete. LogistiCare will retain its name and continue to be headquartered in Atlanta, GA, and the Company will continue to be named The Providence Service Corporation and be listed on NASDAQ under the ticker symbol “PRSC”. See Note 8, Restructuring and Related Reorganization Costs, and Note 16, Segments, in our condensed consolidated financial statementsfor further information on the Organizational Consolidation.
Workforce Development Services (“WD Services”) – Global provider of employment preparation and placement and legal offender rehabilitation services to eligible participants of government sponsored programs.
Our Matrix Investment – Minority interestsegment consists of a minority investment in CCHN Group Holdings, Inc. and its subsidiaries (“Matrix”), a nationwide provider of in-home care optimizationhome and management solutions,mobile-based healthcare services for health plans in the United States, including comprehensive health assessments, to membersquality gap closure visits, “level of managedservice” needs assessments, and post-acute and chronic care organizations, accounted for as an equity method investment.management. Matrix provides these services through a network of community-based clinicians and a fleet of mobile health clinics with advanced diagnostics capabilities.
Business Outlook and Trends
Our performance is affected by a number of trends that drive the demand for our services. In particular, the markets in which we operate are exposed to various trends such as healthcare industry and demographic dynamics in the United States (“U.S.”) and international government outsourcing and employment dynamics. Over the long term, we believe there are numerous factors that could affect growth within the industries in which we operate, including:
an aging population, which will increase demand for healthcare services;services and transportation;
a movement towards value-based versus fee for service care and budget pressure on governments, both of which may increase the use of private corporations to provide necessary and innovative services;
increasing demand for in-home care provision, driven by cost pressures on traditional reimbursement models and technological advances enabling remote engagement;
technological advancements, which may be utilized by us to improve service and lower costs, andbut also by others which may increase industry competitiveness;
| |
| • | MCOs that provide Medicare advantage are increasingly providing non-emergency medical transportation services as a benefit in accordance with current social trends; and |
changes in UK government policy, such as decreased volumes in future welfare-to-work programs, specifically throughproposals by the UK’s Work and Health Programme, which will have a reduced scope and reduced funding compared with the prior programs;
the resultsPresident of the referendum onUnited States and Congress to change the UK’s exit fromMedicaid program, including considering converting the European UnionMedicaid program to a block grant format or capping the federal contribution to state Medicaid programs to a fixed amount per beneficiary, and related politicalthe Centers for Medicare and economic uncertainty inMedicaid Services’ grant of waivers to states relative to the UK; and
the U.S. federal government's expressed intent to repeal the Patient Protection and Affordable Care Act and replace such law with an alternative proposal. The detailsparameters of both the extent of the provisions that may be repealed as well as the details of any potential replacement legislation are uncertain at this time.their Medicaid programs. Enactment of adverse legislation, regulation or agency guidance, or litigation challenges to the Patient Protection and Affordable Care Act, state Medicaid programs, or other governmental programs may reduce the eligibility or demand for our services, our ability to conduct some or all of our business and/or reimbursement rates for services performed within our segments.
Historically, our segments have grown through organic expansion into new markets and service lines, organic expansion within existing markets and service lines, increases in the number of members served under contracts we have been awarded, the securing of new contracts, and acquisitions. As we continue to focus our attention and capital on our domestic, healthcare services operations ("U.S. Healthcare Services"), we may pursue the acquisition of attractive businesses that are complementary to our U.S. Healthcare Services. In addition, as evidenced by the 2016 Matrix Transaction (as defined below), we may also enter into strategic partnerships if we feel this provides the best opportunity to maximize shareholder value. The pursuit of our strategy may also result in the disposition of current or future investments, as demonstrated in 2017 with our sale of our equity investment in Mission Providence and in 2015 with the sale of our Human Services segment. In coming to these determinations, we base our decisions on a variety of factors, including the availability of alternative opportunities to deploy capital, maximize shareholder value or other strategic considerations. Furthermore, the Company typically incurs costs related to merger and acquisition activities, including third-party costs, whether the transaction is completed or not.
Critical accounting estimatesAccounting Estimates and policiesPolicies
As discussed in Note 2, Significant Accounting Policies and Recent Accounting Pronouncements, and Note 9, Leases, in our condensed consolidated financial statements, as of September 30, 2017,January 1, 2019, the Company adopted a new standard on leases. Other than this standard, there hashave been no changesignificant changes in our critical accounting policies other than for stock-based compensation and recoverability of goodwill, as discussed below.to our condensed consolidated financial statements. 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, 2016.
Stock-Based Compensation
Our primary forms of employee stock-based compensation are stock option awards and restricted stock awards, including certain awards which vest based upon performance conditions. We measure the value of stock option awards on the date of grant at fair value using the appropriate valuation techniques, including the Black-Scholes and Monte Carlo option-pricing models. We recognize the fair value as stock-based compensation expense on a straight-line basis over the requisite service period, which is typically the vesting period. The pricing models require various highly judgmental assumptions including volatility and expected option term. If any of the assumptions used in the models change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.
As a result of the adoption of Accounting Standards Update (“ASU”) No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), effective January 1, 2017, we no longer record stock-based compensation expense net of estimated forfeitures and the tax effects of awards are treated as discrete items in the period in which tax windfalls or shortfalls occur. The adoption also impacted the presentation of cash flows and the computation of earnings per share.
The adoption of ASU 2016-09 will subject our tax rate to quarterly volatility from the effects of stock award exercises and vesting activities, including the adverse impact on our income tax provision for awards which result in a tax deduction less than the amount recorded for financial reporting purposes based upon the fair value of the award at the grant date. For example, no shares will be distributed under the Company’s 2015 Holding Company LTI Program (the “HoldCo LTIP”) unless the volume weighted average of Providence’s stock price over a 90-day period ending on December 31, 2017 exceeds $56.79. If this market condition is not satisfied, a significant tax shortfall will result, causing an adverse impact on our tax provision.
Recoverability of Goodwill
Goodwill. In accordance with ASC 350, Intangibles-Goodwill and Other, we review goodwill for impairment annually, or more frequently, if events and circumstances indicate that an asset may be impaired. Such circumstances could include, but are not limited to: (1) the loss or modification of significant contracts, (2) a significant adverse change in legal factors or in business climate, (3) unanticipated competition, (4) an adverse action or assessment by a regulator, or (5) a significant decline in the Company’s stock price. We perform the annual goodwill impairment test for all reporting units as of October 1.
First, we perform qualitative assessments for each reporting unit to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment suggests that it is more likely than not that the fair value of a reporting unit is less than its carrying value amount, we then perform a quantitative assessment and compare the fair value of the reporting unit to its carrying value.
We adopted ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350):Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) effective April 1, 2017. ASU 2017-04 removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step two of the goodwill impairment test. Instead, if we deem it necessary to perform the quantitative goodwill impairment test in an annual or interim period, we recognize an impairment charge equal to the excess, if any, of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
2018.
Results of operationsOperations
Segment reporting. Our segments reflect the manner in which our operations are organized and reviewed by management along our segment lines. management.
We operate in twoone principal business segments:segment, NET Services and WD Services. Our investment in CCHN Group Holdings, Inc. and its subsidiaries (“Matrix”)Matrix is also a reportable segment referred to as the “Matrix Investment”.
On October 19, 2016, affiliates of Frazier Healthcare Partners purchased a 53.2% equity interest in Matrix, with Providence retaining a 46.8% equity interest (the “Matrix Transaction”), resulting in our ownership of a noncontrolling interest (46.6% as of September 30, 2017) in our historical Health Assessment Services (“HA Services”) segment. The HA Services segment results of operations for the periods through October 19, 2016 are separately discussed in the “Discontinued operations, net of tax” section set forth below. The results of operations for periods subsequent to October 19, 2016 are separately discussed in the “Equity in net loss of investees” section set forth below. Additionally, effective November 1, 2015, we completed the sale of our Human Services segment. The Human Services segment results of operations are separately discussed in the “Discontinued operations, net of tax” section set forth below. Subsequent to the sale of our Human Services segment, we have incurred additional expenses in certain periods related to the settlement of indemnification claims and associated legal costs, which are recorded to “Discontinued operations, net of tax”.
Segment results are based on how our chief operating decision maker manages our business, makes operating decisions and evaluates operating performance. The operating results of the twoour principal business segmentssegment include revenue and expenses incurred by the segment, as well as, an allocation of certain direct expenses incurred by our corporate division on behalf ofeffective January 1, 2019, the segment. Indirect expenses, including unallocated corporate functions and expenses, such asCompany’s activities that include executive, finance, accounting, human resources, insurance administration,finance, internal audit, process improvement, information technologytax, legal, certain strategic and legal, as well ascorporate development functions and the results of ourthe Company’s captive insurance company (the “Captive”company. See Note 16, Segments, in our condensed consolidated financial statements for further information on our change in segments during the three months ended March 31, 2019.
Discontinued operations. During prior years, the Company completed the following transactions, which resulted in the presentation of the related operations as Discontinued Operations.
On December 21, 2018, the Company completed the sale of substantially all of the operating subsidiaries of its WD Services segment to Advanced Personnel Management Global Pty Ltd of Australia (“APM”) and elimination entriesAPM UK Holdings Limited, an affiliate of APM, except for the segment’s employment services operations in Saudi Arabia. The Company’s contractual counterparties in Saudi Arabia, including an entity owned by the Saudi Arabian government, assumed these operations beginning January 1, 2019. Additionally, on June 11, 2018, the Company entered into a Share Purchase Agreement to sell Ingeus France for a de minimis amount. The sale was effective on July 17, 2018.
On November 1, 2015, the Company completed the sale of its Human Services segment. In addition to the results through the sale date, the Company has recorded in consolidation are reflected in “Corporate and Other”.additional expenses related to legal proceedings associated with an indemnified legal matter.
Q3 2017Q2 2019 compared to Q3 2016Q2 2018
Consolidated Results. The following table sets forth results of operations and the percentage of consolidated total revenues represented by items in our unaudited condensed consolidated statements of incomeoperations for Q3 2017Q2 2019 and Q3 2016Q2 2018 (in thousands):
|
| | | | | | | | | | | |
| | Three months ended September 30, |
| | 2017 | | 2016 |
| | $ | | Percentage of Revenue | | $ | | Percentage of Revenue |
| Service revenue, net | 409,517 |
| | 100.0 | % | | 412,271 |
| | 100.0 | % |
| | | | | | | | |
| Operating expenses: | | | | | | | |
| Service expense | 378,032 |
| | 92.3 | % | | 378,488 |
| | 91.8 | % |
| General and administrative expense | 18,629 |
| | 4.5 | % | | 17,320 |
| | 4.2 | % |
| Depreciation and amortization | 6,547 |
| | 1.6 | % | | 6,670 |
| | 1.6 | % |
| Total operating expenses | 403,208 |
| | 98.5 | % | | 402,478 |
| | 97.6 | % |
| | | | | | | | |
| Operating income | 6,309 |
| | 1.5 | % | | 9,793 |
| | 2.4 | % |
| | | | | | | | |
| Non-operating expense: | | | | | | | |
| Interest expense, net | 302 |
| | 0.1 | % | | 338 |
| | 0.1 | % |
| Equity in net (gain) loss of investees | 460 |
| | 0.1 | % | | 1,517 |
| | 0.4 | % |
| Gain on sale of equity investment | (12,606 | ) | | 3.1 | % | | — |
| | — | % |
| Loss (gain) on foreign currency transactions | 200 |
| | — | % | | (482 | ) | | 0.1 | % |
| Income from continuing operations before income taxes | 17,953 |
| | 4.4 | % | | 8,420 |
| | 2.0 | % |
| Provision for income taxes | 2,989 |
| | 0.7 | % | | 4,678 |
| | 1.1 | % |
| Income from continuing operations, net of tax | 14,964 |
| | 3.7 | % | | 3,742 |
| | 0.9 | % |
| Discontinued operations, net of tax | (16 | ) | | — | % | | (2,791 | ) | | 0.7 | % |
| Net income | 14,948 |
| | 3.7 | % | | 951 |
| | 0.2 | % |
| Net loss attributable to noncontrolling interest | (95 | ) | | — | % | | (301 | ) | | 0.1 | % |
| Net income attributable to Providence | 14,853 |
| | 3.6 | % | | 650 |
| | 0.2 | % |
|
| | | | | | | | | | | |
| | Three months ended June 30, |
| | 2019 | | 2018 |
| | $ | | Percentage of Revenue | | $ | | Percentage of Revenue |
| Service revenue, net | 363,911 |
| | 100.0 | % | | 343,736 |
| | 100.0 | % |
| | | | | | | | |
| Operating expenses: | | | | | | | |
| Service expense | 345,948 |
| | 95.1 | % | | 317,741 |
| | 92.4 | % |
| General and administrative expense | 16,860 |
| | 4.6 | % | | 18,139 |
| | 5.3 | % |
| Asset impairment charge | — |
| | — | % | | 678 |
| | 0.2 | % |
| Depreciation and amortization | 4,353 |
| | 1.2 | % | | 3,747 |
| | 1.1 | % |
| Total operating expenses | 367,161 |
| | 100.9 | % | | 340,305 |
| | 99.0 | % |
| | | | | | | | |
| Operating (loss) income | (3,250 | ) | | (0.9 | )% | | 3,431 |
| | 1.0 | % |
| | | | | | | | |
| Other expenses (income): | | | | | | | |
| Interest expense, net | 301 |
| | 0.1 | % | | 232 |
| | 0.1 | % |
| Other income | (66 | ) | | — | % | | — |
| | — | % |
| Equity in net loss of investee | 1,315 |
| | 0.4 | % | | 174 |
| | 0.1 | % |
| (Loss) income from continuing operations before income taxes | (4,800 | ) | | (1.3 | )% | | 3,025 |
| | 0.9 | % |
| (Benefit) provision for income taxes | (1,391 | ) | | (0.4 | )% | | 1,062 |
| | 0.3 | % |
| (Loss) income from continuing operations, net of tax | (3,409 | ) | | (0.9 | )% | | 1,963 |
| | 0.6 | % |
| Income (loss) from discontinued operations, net of tax | 1,697 |
| | 0.5 | % | | (13,366 | ) | | (3.9 | )% |
| Net loss | (1,712 | ) | | (0.5 | )% | | (11,403 | ) | | (3.3 | )% |
| Net income from discontinued operations attributable to non-controlling interest | — |
| | — | % | | 188 |
| | 0.1 | % |
| Net loss attributable to Providence | (1,712 | ) | | (0.5 | )% | | (11,215 | ) | | (3.3 | )% |
Service revenue, net. Consolidated service Service revenue, net for Q3 2017 decreased $2.8NET Services for Q2 2019 increased $20.2 million, or 0.7%5.9%, compared to Q3 2016. Revenue for Q3 2017 comparedQ2 2018. The increase in Q2 2019 was primarily related to Q3 2016 included a decreasenew state contract in revenue attributable to WD ServicesWest Virginia and new MCO contracts in Minnesota and Louisiana, higher utilization across multiple not at-risk and reconciliation contracts and the addition of $10.3 million. This decrease in revenue wasCirculation, which contributed $11.3 million of revenue. These increases were partially offset by the impact of contracts we no longer serve, including a state contract in Rhode Island and an increaseMCO contract in revenue attributable toCalifornia.
Service expense, net. Service expense for our NET Services of $7.5 million. Excludingsegment included the favorable effects of changes in currency exchange rates, consolidated service revenue decreased 0.8%following for Q3 2017 compared to Q3 2016.Q2 2019 and Q2 2018 (in thousands):
Total operating expenses. Consolidated operating expenses |
| | | | | | | | | | | |
| | Three Months Ended June 30, |
| | 2019 | | 2018 |
| | $ | | Percentage of Revenue | | $ | | Percentage of Revenue |
| Purchased services | 297,425 |
| | 81.7 | % | | 269,781 |
| | 78.5 | % |
| Payroll and related costs | 37,437 |
| | 10.3 | % | | 37,137 |
| | 10.8 | % |
| Other operating expenses | 11,086 |
| | 3.0 | % | | 10,823 |
| | 3.1 | % |
| Total service expense | 345,948 |
| | 95.1 | % | | 317,741 |
| | 92.4 | % |
Service expense for Q3 2017Q2 2019 increased $0.7$28.2 million, or 0.2%8.9%, compared to Q3 2016. Operating expensesQ2 2018 due primarily to higher purchased transportation costs. Transportation costs increased as a result of higher utilization across multiple contracts and higher per unit cost.
General and administrative expense. General and administrative expense for Q3 2017Q2 2019 decreased $1.3 million, or 7.1%, compared to Q3 2016 included an increase in expenses attributableQ2 2018. The decrease was due primarily to NET Servicescost savings generated as part of $10.8 million and an increase in expenses attributable to Corporate and Other of $0.5 million. This increase in operating expenses was the Organizational Consolidation,
partially offset by a decreaseadditional costs associated with Circulation during Q2 2019.
Asset impairment charge. Asset impairment charge of $0.7 million was incurred in operating expenses attributableQ2 2018 in relation to WD Servicesthe decision to abandon specific development work intended to synchronize data across applications of $10.6 million.the proprietary LCAD Nextgen system, based on the determination of an alternative method to accomplish this task.
Operating income. Consolidated operating incomeDepreciation and amortization. Depreciation and amortization for Q3 2017 decreased $3.5Q2 2019 increased $0.6 million or 35.6%, compared to Q3 2016. The decrease wasQ2 2018 primarily attributabledue to a decrease in operating income in Q3 2017 as comparedthe addition of long-lived assets relating to Q3 2016 at NET Services of $3.3 million and an increase in Corporate and Other operating loss of $0.6 million. This decrease in operating income was partially offset by an increase in WD Services operating income of $0.3 million.information technology projects.
Interest expense, net. Consolidated interest expense net for Q3 2017Q2 2019 was $0.3 million, as a result of borrowing and Q3 2016 remained relatively consistent.credit facility administration costs, and $0.2 million for Q2 2018, as a result of credit facility administration costs.
Equity in net (gain) loss of investees. Equity in net (gain) loss of investees primarily relates to our investments in Mission Providence and Matrix. Mission Providence, which was sold effective September 29, 2017, was part of WD Services, and began providing services in July 2015. We recorded 75% of Mission Providence’s profit or loss in equity in net (gain) loss of investees. We began reporting Matrix as an equity investment effective October 19, 2016, upon the completion of the Matrix Transaction, and record our share of Matrix’s profit or loss in net (gain) loss of investees.investee. Our equity in net loss of investeesinvestee for Q3 2017Q2 2019 of $0.5$1.3 million primarily related towas a result of our equity in net loss for Mission Providence of $0.5 million. Matrix was close to break-even on a net income basis in Q3 2017.Matrix. Included in Matrix’s Q2 2019 standalone results are depreciation and amortization of $8.5$11.3 million, interest expense of $3.7$6.4 million, equity compensation of $0.6$0.3 million, management fees paid to certain of Matrix’s shareholders of $0.6 million, and merger and acquisition related diligencetransactions costs of $0.3 million, and an income tax benefit of $1.2 million.
Gain on saleFor Q2 2018, our equity in net loss of equity investment. The gain on sale of equity investment of $12.6 million relates to the sale of the Company's equity interest in Mission Providence effective September 29, 2017. The investment in Mission Providence was part of the WD Services segment.
Loss (gain) on foreign currency transactions. The foreign currency lossinvestee of $0.2 million and foreign currency gain of $0.5 million for Q3 2017 and Q3 2016, respectively, were primarily due to translation adjustmentswas a result of our foreign subsidiaries.equity in net loss for Matrix. Included in Matrix’s standalone Q2 2018 results were equity compensation of $0.9 million, management fees paid to certain of Matrix’s shareholders of $0.7 million, depreciation and amortization of $9.4 million, interest expense of $5.9 million, integration costs of $1.6 million and an income tax benefit of $0.4 million.
Provision for income taxes. Our The Company’s effective tax rate from continuing operations for Q3 2017Q2 2019 and Q3 2016Q2 2018 was 16.7%29.0% and 55.6%35.1%, respectively. TheThese effective tax rate exceededrates from continuing operations were higher than the U.S. federal statutory rate of 35% for Q3 201621.0% primarily due to foreign net operating losses (including equity investment losses) for which the future income tax benefit currently cannot be recognized, losses in foreign jurisdictions with tax rates lower than the U.S. rate of 35%, state income taxes and certain non-deductible expenses. Foreign net operating losses for which no tax benefit can be provided were higherexpenses offset, in Q3 2016 versus Q3 2017 resulting in a decrease inpart, by the effective tax rate from Q3 2016 to Q3 2017. Additionally, there is no provision for income taxes related to the gain on sale of equity investment of $12.6 million due to the substantial difference in tax basis versus book basis in the investment.
The Company recorded excess tax deficiencies related to stock-based compensation for the three months ended September 30, 2017 of $0.3 million which increased the provision for income taxes. The adoption of ASU 2016-09 subjects our tax rate to quarterly volatility from the effectsfavorable impact of stock award exercises and vesting activities, including the adverse impact on our income tax provision for awards which result in a tax deduction less than the amount recorded for financial reporting purposes based upon fair value of the award at the grant date.option deductions.
DiscontinuedLoss from discontinued operations, net of tax. Discontinued Loss from discontinued operations, net of tax, includes the activity ofrelated to our former WD Services and Human Services segment and our former HA Services segment, composed entirely of our 100% equity interest in Matrix until the completion of the Matrix Transaction on October 19, 2016. For Q3 2017, discontinued operations, net of tax for our Human Services segment was break-even. For Q3 2016, discontinued operations, net of tax for our Human Services segment was a loss of $5.0 million, and discontinued operations, net of tax for our HA Services segment was net income of $2.2 million.segments. See Note 13, 15, Discontinued Operations, to our condensed consolidated financial statements for additional information.
For Q2 2019, the income from discontinued operations, net of tax, for our former WD Services segment was $1.8 million. The income includes administrative costs related to the wind-down of the WD Services entity in Saudi Arabia. The operations in Saudi Arabia, including personnel, leased facilities and certain assets necessary to provide the employment services, were transferred to a third party as of January 1, 2019, and thus the Company is no longer providing services in Saudi Arabia. For Q2 2019, the loss from discontinued operations, net of tax, for our former Human Services segment was less than $0.1 million.
For Q2 2018, the loss on discontinued operations, net of tax, primarily for our former WD Services segment was $13.4 million. Included in this loss was an operating loss of $12.8 million and a provision for income taxes of $0.6 million.
Net lossincome from discontinued operations attributable to noncontrollingnon-controlling interests. Net loss For Q2 2018, net income from discontinued operations attributable to noncontrollingnon-controlling interests primarily relatesrelated to a minority interest held by a third-party operating partner in our company servicing the offender rehabilitation contract inwithin our historical WD Services segment.
YTD 20172019 compared to YTD 20162018
The following table sets forth results of operations and the percentage of consolidated total revenues represented by items in our unaudited condensed consolidated statements of incomeoperations for YTD 20172019 and YTD 20162018 (in thousands):
|
| | | | | | | | | | | |
| | Nine months ended September 30, |
| | 2017 | | 2016 |
| | $ | | Percentage of Revenue | | $ | | Percentage of Revenue |
| Service revenue, net | 1,216,994 |
| | 100.0 | % | | 1,192,426 |
| | 100.0 | % |
| | | | | | | | |
| Operating expenses: | | | | | | | |
| Service expense | 1,124,478 |
| | 92.4 | % | | 1,095,011 |
| | 91.8 | % |
| General and administrative expense | 53,705 |
| | 4.4 | % | | 52,548 |
| | 4.4 | % |
| Depreciation and amortization | 19,716 |
| | 1.6 | % | | 20,058 |
| | 1.7 | % |
| Total operating expenses | 1,197,899 |
| | 98.4 | % | | 1,167,617 |
| | 97.9 | % |
| | | | | | | | |
| Operating income | 19,095 |
| | 1.6 | % | | 24,809 |
| | 2.1 | % |
| | | | | | | | |
| Non-operating expense: | | | | | | | |
| Interest expense, net | 983 |
| | 0.1 | % | | 1,239 |
| | 0.1 | % |
| Equity in net loss of investees | 991 |
| | 0.1 | % | | 5,693 |
| | 0.5 | % |
| Gain on sale of equity investment | (12,606 | ) | | 1.0 | % | | — |
| | — | % |
| Loss (gain) on foreign currency transactions | 600 |
| | — | % | | (1,332 | ) | | 0.1 | % |
| Income from continuing operations before income taxes | 29,127 |
| | 2.4 | % | | 19,209 |
| | 1.6 | % |
| Provision for income taxes | 8,391 |
| | 0.7 | % | | 12,466 |
| | 1.0 | % |
| Income from continuing operations, net of tax | 20,736 |
| | 1.7 | % | | 6,743 |
| | 0.6 | % |
| Discontinued operations, net of tax | (6,000 | ) | | 0.5 | % | | 332 |
| | — | % |
| Net income | 14,736 |
| | 1.2 | % | | 7,075 |
| | 0.6 | % |
| Net (income) loss attributable to noncontrolling interest | (295 | ) | | — | % | | 433 |
| | — | % |
| Net income attributable to Providence | 14,441 |
| | 1.2 | % | | 7,508 |
| | 0.6 | % |
|
| | | | | | | | | | | |
| | Six months ended June 30, |
| | 2019 | | 2018 |
| | $ | | Percentage of Revenue | | $ | | Percentage of Revenue |
| Service revenue, net | 731,726 |
| | 100.0 | % | | 680,432 |
| | 100.0 | % |
| | | | | | | | |
| Operating expenses: | | | | | | | |
| Service expense | 686,446 |
| | 93.8 | % | | 620,856 |
| | 91.2 | % |
| General and administrative expense | 36,262 |
| | 5.0 | % | | 36,037 |
| | 5.3 | % |
| Asset impairment charge | — |
| | — | % | | 678 |
| | 0.1 | % |
| Depreciation and amortization | 8,827 |
| | 1.2 | % | | 7,327 |
| | 1.1 | % |
| Total operating expenses | 731,535 |
| | 100.0 | % | | 664,898 |
| | 97.7 | % |
| | | | | | | | |
| Operating (loss) income | 191 |
| | — | % | | 15,534 |
| | 2.3 | % |
| | | | | | | | |
| Other expenses (income): | | | | | | | |
| Interest expense, net | 604 |
| | 0.1 | % | | 558 |
| | 0.1 | % |
| Other income | (132 | ) | | — | % | | — |
| | — | % |
| Equity in net loss of investees | 2,971 |
| | 0.4 | % | | 2,519 |
| | 0.4 | % |
| Income from continuing operations before income taxes | (3,252 | ) | | (0.4 | )% | | 12,457 |
| | 1.8 | % |
| (Benefit) provision for income taxes | (1,157 | ) | | (0.2 | )% | | 3,071 |
| | 0.5 | % |
| (Loss) income from continuing operations, net of tax | (2,095 | ) | | (0.3 | )% | | 9,386 |
| | 1.4 | % |
| Loss from discontinued operations, net of tax | 966 |
| | 0.1 | % | | (15,063 | ) | | (2.2 | )% |
| Net loss | (1,129 | ) | | (0.2 | )% | | (5,677 | ) | | (0.8 | )% |
| Net loss attributable to noncontrolling interest | — |
| | — | % | | (108 | ) | | — | % |
| Net loss attributable to Providence | (1,129 | ) | | (0.2 | )% | | (5,785 | ) | | (0.9 | )% |
Service revenue, net. Consolidated service revenue, net for YTD 20172019 increased $24.6$51.3 million, or 2.1%7.5%, compared to YTD 2016. Revenue for YTD 2017 compared to YTD 2016 included an2018. The increase in revenue attributableYTD 2019 was primarily related to NET Servicesa new state contract in West Virginia and new MCO contracts in Minnesota and Louisiana, higher utilization across multiple not at-risk and reconciliation contracts and the addition of $70.5 million. This increase in revenue wasCirculation, which contributed $20.7 million of revenue. These increases were partially offset by the impact of contracts we no longer serve, including a decreasestate contract in revenue attributable to WDRhode Island and an MCO contract in California.
Service expense, net. Service expense for our NET Services of $46.0 million. Excludingsegment included the effects of changes in currency exchange rates, consolidated service revenue increased 3.1%following for YTD 2017 compared to2019 and YTD 2016.2018 (in thousands):
Total operating expenses. Consolidated operating expenses |
| | | | | | | | | | | |
| | Six Months Ended June 30, |
| | 2019 | | 2018 |
| | $ | | Percentage of Revenue | | $ | | Percentage of Revenue |
| Purchased services | 586,114 |
| | 80.1 | % | | 522,843 |
| | 76.8 | % |
| Payroll and related costs | 78,569 |
| | 10.7 | % | | 75,649 |
| | 11.1 | % |
| Other operating expenses | 21,763 |
| | 3.0 | % | | 22,364 |
| | 3.3 | % |
| Total service expense | 686,446 |
| | 93.8 | % | | 620,856 |
| | 91.2 | % |
Service expense for YTD 20172019 increased $30.3$65.6 million, or 2.6%10.6%, compared to YTD 2016. Operating expenses2018 due primarily to higher purchased transportation costs and operational payroll and related costs. Transportation costs increased as a result of higher utilization across multiple contracts and higher per unit cost.
General and administrative expense. General and administrative expense for YTD 2017 compared to YTD 2016 included an increase in expenses attributable to NET Services of $82.1 million. This increase in operating expenses was partially offset by a decrease in operating expenses attributable to WD Services of $51.6 million and a decrease in operating expenses attributable to Corporate and Other of $0.1 million.
Operating income. Consolidated operating income for YTD 2017 decreased $5.72019 increased $0.2 million or 23.0%0.6%, compared to YTD 2016.2018. The decreaseincrease was due primarily attributable to a decreasethe additional costs associated with Circulation during YTD 2019, partially offset by the net cost savings generated as part of the Organizational Consolidation.
Asset impairment charge. Asset impairment charge of $0.7 million was incurred in operating income attributableYTD 2018 in relation to NET Servicesthe decision to abandon specific development work intended to synchronize data across applications of $11.6the proprietary LCAD Nextgen system, based on the determination of an alternative method to accomplish this task.
Depreciation and amortization. Depreciation and amortization for YTD 2019 increased $1.5 million as compared to YTD 2016. This decrease in operating income was partially offset by a decrease in WD Services operating loss2018 primarily due to the addition of $5.7 million and a decrease in Corporate and Other operating loss of $0.2 million.long-lived assets relating to information technology projects.
Interest expense, net. Consolidated interest expense, net was $0.6 million for both YTD 2017 decreased $0.3 million, or 20.7%, compared to2019 and YTD 2016.2018, as a result of borrowing and credit facility administration costs.
Equity in netlossof investees.investee. Our equity in net loss of investees for YTD 20172019 of $1.0$3.0 million includes anthe equity in net loss for Mission Providence of $1.4 million, partially offset by equity in net gain of Matrix of $0.4 million.Matrix. Included in Matrix’s standalone YTD 2019 results are depreciation and amortization of $24.6$22.5 million, interest expense of $11.0 million, transaction bonuses and other transaction related costs of $3.5$12.8 million, equity compensation of $1.9$0.9 million, management fees paid to Matrix’s shareholders of $1.8$1.3 million, merger and acquisition diligence relatedintegration costs of $1.5 million, transactions costs of $0.3 million and income tax benefit of $0.1$2.5 million.
Gain on sale ofOur equity investment. The gain on sale of equity investment of $12.6 million relates to the sale of the Company's equity interest in Mission Providence effective September 29, 2017. The investment in Mission Providence was part of the WD Services segment.
Loss (gain) on foreign currency transactions. The foreign currencynet loss of $0.6investee for YTD 2018 of $2.5 million includes the equity in net loss of Matrix. Included in Matrix’s standalone YTD 2018 results are depreciation and amortization of $18.4 million, interest expense of $16.3 million, equity compensation of $1.6 million, management fees paid to Matrix’s shareholders of $3.8 million, merger and acquisition diligence related costs of $2.2 million, integration costs of $2.4 million and foreign currency gainan income tax benefit of $1.3 million for YTD 2017 and YTD 2016, respectively, were primarily due to translation adjustments of our foreign subsidiaries.$3.1 million.
Provision for income taxes. Our effective tax rates from continuing operations for YTD 20172019 and YTD 2016 was 28.8%2018 were 35.6% and 64.9%24.7%, respectively. TheThese effective tax rate exceededrates from continuing operations were higher than the U.S. federal statutory rate of 35% for YTD 201621.0% primarily due to foreign net operating losses (including equity investment losses) for which the future income tax benefit currently cannot be recognized, losses in foreign jurisdictions with tax rates lower than the U.S. rate of 35%, state income taxes and certain non-deductible expenses. Foreign net operating losses for which no tax benefit can be provided were higherexpenses offset, in YTD 2016 versus YTD 2017 resulting in a decrease inpart, by the effective tax rate from YTD 2016 to YTD 2017. Additionally, there was no provision for income taxes related to the gain on sale of equity investment of $12.6 million due to the substantial difference in tax basis versus book basis in the investment.
The Company recorded excess tax deficiencies related to stock-based compensation for the nine months ended September 30, 2017 of $0.1 million which increased the provision for income taxes. The adoption of ASU 2016-09 subjects our tax rate to quarterly volatility from the effectsfavorable impact of stock award exercises and vesting activities, including the adverse impact on our income tax provision for awards which result in a tax deduction less than the amount recorded for financial reporting purposes based upon fair value of the award at the grant date.option deductions.
DiscontinuedLoss from discontinued operations, net of tax. Discontinued Loss from discontinued operations, net of tax, includes the activity ofrelated to our former WD Services and Human Services segment and our former HA Services segment, composed entirely of our 100% equity interest in Matrix until the completion of the Matrix Transaction on October 19, 2016. For YTD 2017, discontinued operations, net of tax for our Human Services segment was a loss of $6.0 million, which primarily related to the accrual of a contingent liability of $9.0 million related to the settlement of indemnification claims and associated legal costs of $0.6 million, partially offset by a related tax benefit. For YTD 2016, discontinued operations, net of tax for our Human Services segment was a net loss of $5.0 million, and discontinued operations, net of tax for our HA Services segment was net income of $5.4 million.segments. See Note 13, 15, Discontinued Operations, to our condensed consolidated financial statements for additional information.
For YTD 2019, the income from discontinued operations, net of tax, for our former WD Services segment was $1.1 million. The income includes administrative costs related to the wind-down of the WD Services entity in Saudi Arabia. The operations in Saudi Arabia, including personnel, leased facilities and certain assets necessary to provide the employment services, were transferred to a third party as of January 1, 2019, and thus the Company is no longer providing services in Saudi Arabia. For Q2 2019, the loss from discontinued operations, net of tax, for our former Human Services segment was $0.2 million.
For Q2 2018, the loss on discontinued operations, net of tax, primarily for our former WD Services segment was $15.1 million. Included in this loss was an operating loss of $15.3 million and a provision for income taxes of $0.4 million, offset by a gain on foreign currency transactions of $0.6 million.
Net (income) lossincome from discontinued operations attributable to noncontrollingnon-controlling interests. Net (income) loss For YTD 2018, net income from discontinued operations attributable to noncontrollingnon-controlling interests primarily relatesrelated to a minority interest held by a third-party operating partner in our company servicing the offender rehabilitation contract inwithin our historical WD Services segment.
Segment Results. The following analysis includes discussion of each of our segments.
Seasonality
NET Services
NET Services segment financial results are as follows for Q3 2017 and Q3 2016 (in thousands):
|
| | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2017 | | 2016 |
| | $ | | Percentage of Revenue | | $ | | Percentage of Revenue |
| Service revenue, net | 324,824 |
| | 100.0 | % | | 317,280 |
| | 100.0 | % |
| | | | | | | | |
| Service expense | 304,454 |
| | 93.7 | % | | 293,919 |
| | 92.6 | % |
| General and administrative expense | 2,899 |
| | 0.9 | % | | 2,860 |
| | 0.9 | % |
| Depreciation and amortization | 3,286 |
| | 1.0 | % | | 3,051 |
| | 1.0 | % |
| Operating income | 14,185 |
| | 4.4 | % | | 17,450 |
| | 5.5 | % |
ServiceWhile revenue net. Service revenue, net for NET Services for Q3 2017 increased $7.5 million, or 2.4%, compared to Q3 2016. The increase was primarily related to net increased revenue from existing contracts of $19.2 million, due to the net impact of membership and rate changes, including final agreement on a rate adjustment related to increased utilization and the release of previously accrued revenue hold-backs based on certain contract performance requirements on a significant contract, in addition to the impact of new contracts which contributed $18.8 million of revenue for Q3 2017. These increases were partially offset by the impact of contracts we no longer serve, including a contract with the state of New York, which resulted in a decrease in revenue of $30.5 million.
Service expense, net. Service expense for our NET Services segment included the following for Q3 2017 and Q3 2016 (in thousands):
|
| | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2017 | | 2016 |
| | $ | | Percentage of Revenue | | $ | | Percentage of Revenue |
| Purchased services | 250,282 |
| | 77.1 | % | | 241,884 |
| | 76.2 | % |
| Payroll and related costs | 40,753 |
| | 12.5 | % | | 41,832 |
| | 13.2 | % |
| Other operating expenses | 13,299 |
| | 4.1 | % | | 10,130 |
| | 3.2 | % |
| Stock-based compensation | 120 |
| | 0.0 | % | | 73 |
| | 0.0 | % |
| Total service expense | 304,454 |
| | 93.7 | % | | 293,919 |
| | 92.6 | % |
Service expense for Q3 2017 increased $10.5 million, or 3.6%, compared to Q3 2016 due primarily to higher purchased services and other operating costs, partially offset by decreased payroll and related costs.
Purchased services as a percentage of revenue increased from 76.2% in Q3 2016 to 77.1% in Q3 2017 primarily attributable to an increase in utilization across certain contracts, including multiple managed care contracts in California, and the impact of new managed care organization contracts in certain markets being at a lower margin than previous contracts. These increases were partially offset by initiatives aimed at better aligning the rates we pay to our transportation provider partners with local market conditions and the fees paid to us by our customers. In addition, the impact of Hurricane Irma resulted in decreased utilization for certain contracts.
Payroll and related costs as a percentage of revenue decreased from 13.2% in Q3 2016 to 12.5% in Q3 2017 due to efficiencies gained from multiple process improvement initiatives, including those aimed at lowering payroll expense across our reservation and operation center networks, as well as a decrease in incentive compensation. Other operating expenses increased for Q3 2017 as compared to Q3 2016 primarily attributable to an incremental $1.5 million of value enhancement and related costs incurred for external resources used in the design and implementation of NET Services member experience and value enhancement initiatives, as well as increased software and hardware maintenance costs associated with new technology initiatives.
General and administrative expense. General and administrative expense in Q3 2017 remained constant as compared to Q3 2016. As a percentage of revenue, general and administrative expense remained constant at 0.9%.
Depreciation and amortization. Depreciation and amortization increased $0.2 million primarily due to the addition of long-lived assets relating to information technology projects. As a percentage of revenue, depreciation and amortization remained constant at 1.0% for Q3 2016 and Q3 2017.
NET Services segment financial results are as follows for YTD 2017 and YTD 2016 (in thousands):
|
| | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
| | $ | | Percentage of Revenue | | $ | | Percentage of Revenue |
| Service revenue, net | 987,662 |
| | 100.0 | % | | 917,157 |
| | 100.0 | % |
| | | | | | | | |
| Service expense | 927,082 |
| | 93.9 | % | | 846,311 |
| | 92.3 | % |
| General and administrative expense | 8,879 |
| | 0.9 | % | | 8,483 |
| | 0.9 | % |
| Depreciation and amortization | 9,763 |
| | 1.0 | % | | 8,858 |
| | 1.0 | % |
| Operating income | 41,938 |
| | 4.2 | % | | 53,505 |
| | 5.8 | % |
Service revenue, net. Service revenue, net for NET Services for YTD 2017 increased $70.5 million, or 7.7%, compared to YTD 2016. The increase was primarily related to net increased revenue from existing contracts of $68.3 million, due to the net impact of membership and rate changes, including final agreement on a rate adjustment related to increased utilization and the release of previously accrued revenue hold-backs based on certain contract performance requirements on a significant contract, in addition to the impact of new contracts, including new managed care organization contracts in Florida and New York, which contributed $70.5 million of revenue for YTD 2017. These increases were partially offset by the impact of contracts we no longer serve, including a contract with the state of New York, which resulted in a decrease in revenue of $68.3 million.
Service expense, net. Service expense for our NET Services segment included the following for YTD 2017 and YTD 2016 (in thousands):
|
| | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
| | $ | | Percentage of Revenue | | $ | | Percentage of Revenue |
| Purchased services | 766,303 |
| | 77.6 | % | | 694,934 |
| | 75.8 | % |
| Payroll and related costs | 122,784 |
| | 12.4 | % | | 122,117 |
| | 13.3 | % |
| Other operating expenses | 37,584 |
| | 3.8 | % | | 29,032 |
| | 3.2 | % |
| Stock-based compensation | 411 |
| | 0.0 | % | | 228 |
| | 0.0 | % |
| Total service expense | 927,082 |
| | 93.9 | % | | 846,311 |
| | 92.3 | % |
Service expense for YTD 2017 increased $80.8 million, or 9.5%, compared to YTD 2016 due primarily to higher purchased services and other operating costs, with a slight increase in payroll and related costs.
The increase in service expense was primarily attributable to the impact of new managed care organization contracts in California, Florida and New York. Purchased services as a percentage of revenue increased from 75.8% in YTD 2016 to 77.6% in YTD 2017 primarily attributable to an increase in utilization across multiple contracts. The higher utilization was in part driven by increased Medicaid reimbursement in New Jersey for certain medical services, which in turn increased demand for transportation services; increased utilization across multiple managed care contracts in California; and lower cancellation rates across multiple contracts, which we believe was primarily due to milder winter weather conditions during the first quarter of 2017, although we did experience lower utilization for contracts in Q3 2017 due in part to the impact of the Hurricane Irma.
Payroll and related costs as a percentage of revenue decreased from 13.3% in YTD 2016 to 12.4% in YTD 2017 due to efficiencies gained from multiple process improvement initiatives, including those aimed at lowering payroll expense across our reservation and operation center networks, as well as a decrease in incentive compensation. Other operating expenses increased for YTD 2017 as compared to YTD 2016 primarily attributable to an incremental $3.5 million of value enhancement and related costs incurred for external resources used in the design and implementation of NET Services member experience and value enhancement initiatives in YTD 2017.
General and administrative expense. General and administrative expense in YTD 2017 increased $0.4 million, or 4.7%, as compared to YTD 2016, due to increased facility costs resulting from the overall growth of our operations. As a percentage of revenue, general and administrative expense remained constant at 0.9%.
Depreciation and amortization. Depreciation and amortization increased $0.9 million primarily due to the addition of long-lived assets relating to information technology projects. As a percentage of revenue, depreciation and amortization remained constant at 1.0%.
WD Services
WD Services segment financial results are as follows for Q3 2017 and Q3 2016 (in thousands):
|
| | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2017 | | 2016 |
| | $ | | Percentage of Revenue | | $ | | Percentage of Revenue |
| Service revenue, net | 84,693 |
| | 100.0 | % | | 94,960 |
| | 100.0 | % |
| | | | | | | | |
| Service expense | 73,581 |
| | 86.9 | % | | 84,051 |
| | 88.5 | % |
| General and administrative expense | 6,980 |
| | 8.2 | % | | 6,780 |
| | 7.1 | % |
| Depreciation and amortization | 3,166 |
| | 3.7 | % | | 3,497 |
| | 3.7 | % |
| Operating income | 966 |
| | 1.1 | % | | 632 |
| | 0.7 | % |
Service revenue, net. Service revenue, net for Q3 2017 decreased $10.3 million, or 10.8%, compared to Q3 2016. Excluding the favorable effects of changes in currency exchange rates, service revenue decreased 11.2% in Q3 2017 compared to Q3 2016. This decrease was primarily related to the anticipated ending of referrals under the segment’s primary employability program in the UK, as well as decreased revenue under our offender rehabilitation program due to $5.4 million of revenue recognized in Q3 2016 related to the finalization of a contractual adjustment for the prior contract years ended March 31, 2015 and 2016.
These revenue decreases were partially offset by increases in health services in the UK and various employability contracts outside the UK, including France, Australia and Germany.
Service expense. Service expense for our WD Services segment included the following for Q3 2017 and Q3 2016 (in thousands):
|
| | | | | | | | | | | |
| | Three Months Ended September 30, |
| | 2017 | | 2016 |
| | $ | | Percentage of Revenue | | $ | | Percentage of Revenue |
| Payroll and related costs | 41,575 |
| | 49.1 | % | | 47,854 |
| | 50.4 | % |
| Purchased services | 21,946 |
| | 25.9 | % | | 26,004 |
| | 27.4 | % |
| Other operating expenses | 10,046 |
| | 11.9 | % | | 10,166 |
| | 10.7 | % |
| Stock-based compensation | 14 |
| | 0.0 | % | | 27 |
| | 0.0 | % |
| Total service expense | 73,581 |
| | 86.9 | % | | 84,051 |
| | 88.5 | % |
Service expense in Q3 2017 decreased $10.5 million, or 12.5%, compared to Q3 2016. Payroll and related costs decreasedis generally fixed, primarily as a result of the endingcapitated nature of referrals under the segment’s primary employability program inmajority of our contracts, service expense varies based on the UK as well as redundancy plans across the WDutilization of our services. The quarterly operating income and cash flows of NET Services operations that have better aligned headcount with service delivery volumes, resulting in a decrease of payroll and related costs as a percentage of revenue. Payroll and related costs include $0.3 million and $0.1 million in Q3 2017 and Q3 2016, respectively, of termination benefits related to redundancy plans. Purchased services decreased in Q3 2017 compared to Q3 2016 primarilynormally fluctuate as a result of the ending of client referrals under our primary employability programseasonal variations in the UK, which resulted in a decline in the use of outsourced services.
General and administrative expense. General and administrative expense in Q3 2017 increased $0.2 million compared to Q3 2016 due primarilybusiness, principally due to increased rent related to facilities used in our offender rehabilitation program.
Depreciation and amortization. Depreciation and amortization for Q3 2017 decreased $0.3 million compared to Q3 2016, primarily due to the asset impairment charges incurredlower transportation demand during the fourth quarter of 2016, which decreased the value of our intangible assetswinter season and certain property and equipment.
WD Services segment financial results are as follows for YTD 2017 and YTD 2016 (in thousands):
|
| | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
| | $ | | Percentage of Revenue | | $ | | Percentage of Revenue |
| Service revenue, net | 229,332 |
| | 100.0 | % | | 275,293 |
| | 100.0 | % |
| | | | | | | | |
| Service expense | 199,665 |
| | 87.1 | % | | 247,797 |
| | 90.0 | % |
| General and administrative expense | 20,944 |
| | 9.1 | % | | 23,236 |
| | 8.4 | % |
| Depreciation and amortization | 9,695 |
| | 4.2 | % | | 10,912 |
| | 4.0 | % |
| Operating loss | (972 | ) | | -0.4 | % | | (6,652 | ) | | -2.4 | % |
Service revenue, net. Service revenue, net for YTD 2017 decreased $46.0 million, or 16.7%, compared to YTD 2016. Excluding the effects of changes in currency exchange rates, service revenue decreased 12.3% in YTD 2017 compared to YTD 2016. This decrease was primarily related to the anticipated decline of referrals under the segment’s primary employability program in the UK, as well as decreased revenue under our offender rehabilitation program. These decreases were partially offset by increases across various employability contracts outside the UK, including in Australia, Saudi Arabia, France and Germany, as well as increased revenue from our health services contract in the UK. YTD 2017 includes the impact of $5.2 million of revenue recognized under the offender rehabilitation program related to the finalization of a contractual adjustment for the contract year ended March 31, 2017, whereas YTD 2016 includes $5.4 million of revenue recognized under the offender rehabilitation program related to the finalization of a contractual adjustment for the prior contract years ended March 31, 2015 and 2016.
Service expense. Service expense for our WD Services segment included the following for YTD 2017 and YTD 2016 (in thousands):
|
| | | | | | | | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
| | $ | | Percentage of Revenue | | $ | | Percentage of Revenue |
| Payroll and related costs | 130,538 |
| | 56.9 | % | | 162,542 |
| | 59.0 | % |
| Purchased services | 39,949 |
| | 17.4 | % | | 53,210 |
| | 19.3 | % |
| Other operating expenses | 29,136 |
| | 12.7 | % | | 31,993 |
| | 11.6 | % |
| Stock-based compensation | 42 |
| | 0.0 | % | | 52 |
| | 0.0 | % |
| Total service expense | 199,665 |
| | 87.1 | % | | 247,797 |
| | 90.0 | % |
Service expense in YTD 2017 decreased $48.1 million, or 19.4%, compared to YTD 2016. Payroll and related costs decreased primarily as a result of declining referrals under the segment’s primary employability program in the UK as well as redundancy plans that have better aligned headcount with service delivery volumes resulting in a decrease of payroll and related costs as a percentage of revenue. Payroll and related costs include $1.1 million and $5.2 million in YTD 2017 and YTD 2016, respectively, of termination benefits related to redundancy plans. Purchased services decreased in YTD 2017 compared to YTD 2016 primarily as a result of a decline in client referrals under our primary employability program in the UK, which resulted in a decline in the use of outsourced services.
General and administrative expense. General and administrative expense in YTD 2017 decreased $2.3 million compared to YTD 2016 due to office closures associated with restructuring of the UK operations, as well as lower rent for certain offices.
Depreciation and amortization. Depreciation and amortization for YTD 2017 decreased $1.2 million compared to YTD 2016, primarily due to the asset impairment charges incurred during the fourth quarter of 2016, which decreased the value of our intangible assets and certain property and equipment.
Corporate and Other
Corporate and Other includes the headcount and professional service costs incurred at the holding company level, at the Captive, and elimination entries to account for inter-segment transactions. Corporate and Other financial results are as follows for Q3 2017 and Q3 2016 (in thousands):
|
| | | | | |
| | Three Months Ended September 30, |
| | 2017 | | 2016 |
| | $ | | $ |
| Service revenue, net | — |
| | 31 |
|
| | | | |
| Service expense | (3 | ) | | 518 |
|
| General and administrative expense | 8,750 |
| | 7,680 |
|
| Depreciation and amortization | 95 |
| | 122 |
|
| Operating loss | (8,842 | ) | | (8,289 | ) |
Operating loss. Corporate and Other operating loss in Q3 2017 increased by $0.6 million or 6.7% as compared to Q3 2016. This increase was primarily related to a $2.0 million increase in professional costs due to activities associated with our increased focus on strategic initiatives, as well as a $0.6 million increase in compensation, including the timing impact of accruals for incentive compensation. These increases were partially offset by decreases in legal and accounting fees and lower costs in the Company's captive insurance program due to the Company ceasing to write new policies under the captive in Q2 2017, which drove the decrease in “Service expense”.
General and administrative expense includes stock-based compensation for the HoldCo LTIP of $1.0 million and $0.9 million for Q3 2017 and Q3 2016, respectively. No shares will be distributed under the HoldCo LTIP unless the volume weighted average of Providence’s stock price over a 90-day period ending on December 31, 2017 exceeds $56.79.
Corporate and Other financial results are as follows for YTD 2017 and YTD 2016 (in thousands):
|
| | | | | |
| | Nine Months Ended September 30, |
| | 2017 | | 2016 |
| | $ | | $ |
| Service revenue, net | — |
| | (24 | ) |
| | | | |
| Service expense | (2,269 | ) | | 903 |
|
| General and administrative expense | 23,882 |
| | 20,829 |
|
| Depreciation and amortization | 258 |
| | 288 |
|
| Operating loss | (21,871 | ) | | (22,044 | ) |
Operating loss. Corporate and Other operating loss in YTD 2017 decreased by $0.2 million, or 0.8%, as compared to YTD 2016. This decrease was primarily related to a reduction in insurance loss reserves in 2017 due to favorable claims history of our Captive reinsurance programs, which is included in “Service expense” as well as decreased accounting, legal and professional fees included in “General and administrative expense”. This decrease was partially offset by an increase in cash settled stock-based compensation expense of $1.3 million, primarily as a result of a more significant increase in the Company’s stock price in YTD 2017 as compared to YTD 2016, an increase in stock settled stock-based compensation expense of $1.4 million, primarily related to an increase in expense for the HoldCo LTIP and a benefit recorded in YTD 2016 for performance based units, with no corresponding benefit in YTD 2017, as well as an increase of $3.6 million of professional costs due to activities associated with our increased focus on strategic initiatives.
General and administrative expense includes stock-based compensation for the HoldCo LTIP of $3.1 million and $2.4 million for YTD 2017 and YTD 2016, respectively. No shares will be distributed under the HoldCo LTIP unless the volume weighted average of Providence’s stock price over a 90-day period ending on December 31, 2017 exceeds $56.79.
Seasonality
Our quarterly operating results and operating cash flows normally fluctuate due in part to seasonal factors, uneven demand for services and the timing of new contracts, which impact the amount of revenues earned and expenses incurred. NET Services experiences fluctuations inhigher demand during the summer and winter seasons. Due to historically higher demand in the summer months, lower demand during the winter, and a primarily fixed revenue stream based on a per-member, per-month payment structure, NET Services normally experiences lower operating margins during the summer season and higher operating margins during the winter. WD Services is impacted by both the timing of commencement and expiration of major contracts. Under many of WD Services’ contracts, we invest significant sums of money in personnel, leased office space, purchased or developed technology, and other costs, and generally incur these costs prior to commencing services and receiving payments. This results in significant variability in financial performance and cash flows between quarters and for comparative periods. It is expected that future contracts will be structured in a similar fashion. In addition, under the majority of WD Services’ contracts, the Company relies on its customers, which include government agencies, to provide referrals, for whom the Company can provide services and earn revenue. The timing and magnitude of referrals can fluctuate significantly, leading to volatility in revenue.season.
Liquidity and capital resources
Short-term capital requirements consist primarily of recurring operating expenses, and new contract start-up costs including workforce restructuring costs.and costs associated with our Organizational Consolidation and other strategic initiatives. We expect to meet anyour cash requirements through available cash on hand, cash generated from our operating segments,NET Services, and borrowing capacity under our Credit Facility (as defined below).
Cash flow from operating activities was our primary source of cash during YTD 2017. Additionally, YTD 2017 included $15.8 million in proceeds from the sale of our equity investment in Mission Providence which is included in cash provided by investing activities. Our balance of cash and cash equivalents was $92.2$29.8 million and $72.3$5.7 million at SeptemberJune 30, 20172019 and December 31, 2016, respectively, including $33.8 million and $21.4 million held in foreign countries,2018, respectively. The September 30, 2017 foreign cash balance includes the proceeds from the sale of Mission Providence. Such cash held in foreign countries is generally used to fund foreign operations, although it may also be used to repay intercompany indebtedness existing between Providence and its foreign subsidiaries.
We had restricted cash of $7.1$3.7 million and $14.1$4.4 million at SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively, primarily related to contractual obligations and activities of our captive insurance subsidiary. Given expiring policies under our captive insurance subsidiary were not renewed upon expiration in May 2017, we expect our restricted cash balances to decline over time. These restricted cash amounts are not included in our balance of cash and cash equivalents.equivalents in the condensed consolidated balance sheets, although they are included in the cash, cash equivalents and restricted cash balance on the accompanying condensed consolidated statements of cash flows. At Septemberboth June 30, 20172019 and December 31, 2016,2018, we had no amounts outstanding under our Credit Facility.
We may, from time to time, access capital markets to raise equity or debt financing for various business reasons, including acquisitions. We may also raise debt financing to fund future repurchases of our common stock. The timing, term, size, and pricing of any such financing will depend on investor interest and market conditions, and there can be no assurance that we will be able to obtain any such financing. On November 2, 2017, the Company’s Board of Directors approved the extension of the Company’s existing stock repurchase program, authorizing the Company to engage in a common stock repurchase program to repurchase up to $69.6 million (the amount remaining from the $100.0 million repurchase amount authorized in 2016) in aggregate value of the Company’s common stock through December 31, 2018.
The cash flow statementstatements for all periods presented includesinclude both continuing and discontinued operations. Discontinued operations for YTD 2016 includesinclude the activity of our historical WD Services and Human Services and HA Services segments. IncomeThe income from discontinued operations totaled $0.3was $1.0 million for YTD 2016. Significant non-cash items of our2019 and the loss from discontinued operations inwas $15.1 million for YTD 2016 included $3.7 million of depreciation expense and $17.5 million of amortization expense. Our discontinued operations also purchased property and equipment totaling $8.0 million during 2018.
YTD 2016.
YTD 20172019 cash flows compared to YTD 20162018
Operating activities. Cash provided by operating activities was $36.9$23.1 million for YTD 2017, a decrease2019, an increase of $8.3$31.0 million as compared with YTD 2016.2018. YTD 20172019 and YTD 20162018 cash flow from operations waswere driven by net incomeloss of $14.7$1.1 million and $7.1$5.7 million, respectively, non-cash adjustments to reconcile net income to net cash provided by operating activities of $8.0$14.3 million and $37.1$27.5 million, respectively, and changes in working capital of $14.2positive $9.9 million and $1.1negative $29.8 million, respectively. The change in adjustments to reconcile net income to net cash provided by operating activities was due primarily to the impact of the disposition of HA Services, resulting in decreased depreciation, amortization and deferred taxes in YTD 2017 as compared to YTD 2016, as well as the gain on sale of Mission Providence of $12.6 million in YTD 2017. The change in working capital iswas primarily driven by the following:
Accounts receivable generated a cash outflow for YTD 20172019 of $10.6$7.4 million as compared to an outflow of $22.1$34.0 million for YTD 2016.2018. The decrease in cash outflow of $11.5$26.6 million iswas primarily attributable to NET Services due to the timing of collections from a limited number of payers, as well as an outflow of $1.4 million of HAhigher receivables at June 30, 2018 by our discontinued WD Services segment in YTD 2016.certain foreign jurisdictions, including Saudi Arabia, which had experienced significant delays in payment.
Prepaid expensesexpense and other generated a cash inflowoutflow for YTD 2019 of $7.5$4.5 million in YTD 2017, as compared to aan outflow of $11.0 million for YTD 2018. The decrease in cash outflow of $9.9$6.5 million inis due primarily to our discontinued WD Services segment whereby our YTD 2016. The increase in2019 cash flows do not include cash outflows for WD Services' contract assets and costs to fulfill contracts.
Income tax receivable on sale of business generated a cash inflow of $17.4$8.2 million was primarily attributablerelated to U.S. tax payments made previously in 2018 which were refunded in YTD 2019 as a decrease in prepayments inresult of the loss from sale of our WD Services in relation to certain contracts and a decrease in the prepayment of insurance costs and income taxes.segment.
Accounts payable and accrued expenses generated a cash outflowinflow for YTD 2019 of $3.4$9.8 million in YTD 2017, as compared to a cash inflowan outflow of $32.5$4.9 million infor YTD 2016.2018. The decreaseincrease in cash inflow of $35.9$14.6 million is due primarily to the impacttiming of NET Services accrued contract payments of $10.1 million, reduced accruals at WD Services of $3.9 million in YTD 2017 as compared to YTD 2016, including the impact of redundancy plans, timing differences on tax payments, as well as the disposition of HA Services, which generated cash inflow of $5.8 million in YTD 2016. Partially offsetting these impacts is the impact of the increase in the accrued settlement related to our former Human Services segment of $9.0 million during YTD 2017 as compared to an increase of $6.0 million in YTD 2016.vendor payments.
Accrued transportation costs of NET Services generated a cash inflow of $28.8$2.9 million in YTD 2017,2019, as compared to a cash inflow of $31.9$10.5 million in YTD 2016.2018. The decrease in cash inflow of $3.1$7.6 million is due primarily to thehigher purchased service expense and timing of payments.
| |
| • | Deferred revenue generated a cash outflow of $0.4 million in YTD 2019, as compared to a cash inflow of $10.8 million in YTD 2018. The increase in cash outflow of $11.2 million is due primarily to our discontinued WD Services segment whereby our YTD 2019 cash flows do not include cash inflows for WD Services' cash payments received on contracts in advance of services being performed. |
Income taxes payable on sale of business for YTD 2016 includes a cash outflow of $30.2 million related to the sale of our Human Services segment.
Investing activities. Net cash provided byused in investing activities of $4.9$4.3 million in YTD 2017 increased2019 decreased by $40.0$1.4 million as compared to YTD 2016.2018. The increasedecrease was primarily attributable to $15.8 million in proceeds from the sale of our equity investment in Mission Providence, a decrease in funding of our equity investment in Mission Providence of $6.4 million and a decrease in the purchase of property and equipment, of $18.6 million.as YTD 20162018 included purchases of property and equipment of $8.0$3.2 million by our discontinued operations. Also, YTD 2018 included proceeds received on a note receivable related to the sale of a building in 2016.
Financing activities. Net cash used inprovided by financing activities of $22.3$3.3 million in YTD 2017 decreased $9.92019 increased $51.3 million as compared to YTD 2016.2018. During YTD 2017,2018, we repurchased $34.5$56.4 million less of our common stock thancompared to $0.4 million in YTD 2016. Partially offsetting this decrease in cash outflows was a decrease in net proceeds from debt during YTD 2017 as compared to YTD 2016 of $20.3 million as well2019. Additionally, as a decreasepartial offset, in YTD 2018, proceeds from common stock issued pursuant to stock option exercises of $2.6 million.was $6.0 million more than in YTD 2019.
Obligations and commitments
Credit facility.Facility. We are party to the amended and restated credit and guaranty agreement, dated as of August 2, 2013 (as amended, the “Credit Agreement”), with Bank of America, N.A., as administrative agent, swing line lender and letter of credit issuer, and the other lenders party thereto. The Credit Agreement provides us with a $200.0 million revolving credit facility (the “Credit Facility”), including a subfacilitysub-facility of $25.0 million for letters of credit. As of SeptemberJune 30, 2017,2019, we had no borrowings and seventen letters of credit in the amount of $11.0$12.4 million outstanding under the revolving credit facility. At Septemberoutstanding. As of June 30, 2017,2019, our available credit under the revolving credit facilityCredit Facility was $189.0$187.6 million.
Subsequent to June 30, 2019, the Company and certain of its subsidiaries entered an amendment, whereby amending the Credit Agreement, by and among the Company, the guarantors from time to time party thereto, the lenders from time to time party thereto and Bank of America, N.A. as administrative agent. The Amendment extends the maturity date of the Credit Agreement to August 2, 2020.
Under the Credit Agreement, the Company has an option to request an increase in the amount of the revolving credit facility or in a term loan facility from time to time (on substantially the same terms as apply to the existing facilities)facility) in an aggregate amount of up to $75.0 million with either additional commitments from lenders under the Credit Agreement at such time or new commitments from financial institutions acceptable to the administrative agent in its reasonable discretion, so long as no default or event of default exists at the time of any such increase. The Company may not be able to access additional funds under this increase option as no lender is obligated to participate in any such increase under the Credit Facility. TheWe may from time to time incur additional indebtedness, obtain additional financing or refinance existing indebtedness subject to market conditions and our financial condition.
We may prepay any outstanding principal under the Credit Facility matures on August 2, 2018.in whole or in part, at any time without premium or penalty, subject to reimbursement of the lenders’ breakage and redeployment costs in connection with prepayments of London Interbank Offered Rate, or LIBOR, loans. The unutilized portion of the commitments under the Credit Facility may be irrevocably reduced or terminated by us at any time without penalty.
Interest on the outstanding principal amount of theany loans accrues, at the Company’sour election, at a per annum rate equal to LIBOR, plus an applicable margin or the base rate as defined in the agreement plus an applicable margin. The applicable margin ranges from 2.25% to 3.25% in the case of LIBOR loans and 1.25% to 2.25% in the case of the base rate loans, in each case, based on the Company’sour consolidated leverage ratio as defined in the Credit Agreement. Interest on theany loans is payable quarterly in arrears. In addition, the Company iswe are obligated to pay a quarterly commitment fee based on a percentage of the unused portion of each lender’s commitment under the Credit Facility and quarterly letter of credit fees based on a percentage of the maximum amount available to be drawn under each outstanding letter of credit. The commitment fee and letter of credit fee range from 0.25% to 0.50% and 2.25% to 3.25%, respectively, in each case, based on the Company’sour consolidated leverage ratio.
The Company’sCredit Facility also requires us (subject to certain exceptions as set forth in the Amended and Restated Credit Agreement) to prepay the outstanding loans in an aggregate amount equal to 100% of the net cash proceeds received from certain asset dispositions, debt issuances, insurance and casualty awards and other extraordinary receipts.
Our obligations under the Credit Facility are guaranteed by all of the Company’sour present and future domestic subsidiaries, excluding certain domestic subsidiaries, which include the Company’ssuch as, our insurance captives. The Company’scaptive. Our obligations under, and each guarantor’s obligations under its guaranty of, the Credit Facility are secured by a first priority lien on substantially all of the Company’sour respective assets, other than our equity investment in Matrix, including a pledge of 100% of the issued and outstanding stock of the Company’sour domestic subsidiaries, excluding the Company’sour insurance captives, and 65% of the issued and outstanding stock of the Company’s first tier foreign subsidiaries.captive.
The Credit Agreement contains customary affirmative and negative covenants and events of default. The negative covenants include restrictions on the Company’sour ability to, among other things, incur additional indebtedness, create liens, make investments, give guarantees, pay dividends, repurchase shares, sell assets, and merge and consolidate. The Company isWe are subject to financial covenants, including consolidated net leverage and consolidated interest coverage covenants. The Company wasCompany’s consolidated net leverage ratio may not be greater than 3.00:1.00 as of the end of any fiscal quarter and the Company’s consolidated interest coverage ratio may not be less than 3.00:1.00 as of the end of any fiscal quarter. We were in compliance with all covenants as of SeptemberJune 30, 2017.2019.
Preferred Stock. Following (i) the completion of a rights offering in February 2015, under which certain holders of our Common Stock exercised subscription rights to purchase Preferred Stock, and (ii) the purchase of Preferred Stock by certain of Coliseum Capital Partners, L.P., Coliseum Capital Partners II, L.P., Blackwell Partners, LLC - Series A and Coliseum Capital Co-Invest, L.P. and Blackwell Partners, LLC (collectively, the “Standby Purchasers”“Coliseum Stockholders”), pursuant to the Standby Purchase Agreement between the Standby PurchasersColiseum Stockholders and the Company, the Company issued 805,000 shares of Preferred Stock, of which 803,232799,969 shares are outstanding as of SeptemberJune 30, 2017.2019. For further information regarding these transactions, see Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and capital resources – Obligations and commitments – Rights Offering” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2018. We may pay a noncumulative cash dividend on each share of Preferred Stock, when, as and if declared by a committee of our Board of Directors (“Board”), at the rate of 5.5% per annum on the liquidation preference then in effect. On or before the third business day immediately preceding each fiscal quarter, we determine our intention whether or not to pay a cash dividend with respect to that ensuing quarter and give notice of our intention to each holder of Preferred Stock as soon as practicable thereafter.
In the event we do not declare and pay a cash dividend, the liquidation preference will be increased to an amount equal to the liquidation preference in effect at the start of the applicable dividend period, plus an amount equal to such then applicable liquidation preference multiplied by 8.5% per annum, computed on the basis of a 365-day year and the actual number of days elapsed from the start of the applicable dividend period to the applicable date of determination.
Cash dividends are payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year, and, if declared, will begin to accrue on the first day of the applicable dividend period. Paid in kindPaid-in-kind (“PIK”) dividends, if applicable, will accrue and be cumulative on the same schedule as set forth above for cash dividends and will also be compounded at the applicable annual rate on each applicable subsequent dividend date. PIK dividends are paid upon the occurrence of a liquidation event, conversion or redemption in accordance with the terms of the Preferred Stock. Cash dividends were declared for the ninesix months ended SeptemberJune 30, 20172019 and 2018 totaled $3.3 million.$2.2 million in each period.
Reinsurance and Self-Funded Insurance Programs
Reinsurance
We historically reinsured a substantial portion of our automobile, general and professional liability and workers’ compensation costs under reinsurance programs through our wholly-owned captive insurance subsidiary, Social Services Providers Captive Insurance Company, or SPCIC. As of May 16, 2017, SPCIC did not renew the expiring reinsurance policies. SPCIC will continue to resolve claims under the historical policy years.
At SeptemberJune 30, 2017,2019, the cumulative reserve for expected losses since inception of these historical automobile, general and professional liability and workers’ compensation reinsurance programs was $1.8$0.2 million, $0.8$0.4 million and $5.7$1.8 million, respectively. Based on an independent actuarial report, our expected losses related to workers’ compensation, automobile and general and professional liability in excess of our liability under our associated historical reinsurance programs at SeptemberJune 30, 20172019 was $6.1$3.0 million. We recorded a corresponding receivable from third-party insurers and liability at SeptemberJune 30, 20172019 for these expected losses, which would be paid by third-party insurers to the extent losses are incurred.
Further, SPCICwe had restricted cash of $6.8$3.7 million and $13.8$4.4 million at SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively, which was restricted to secure the reinsured claims losses of SPCIC under the historical automobile, general and professional liability and workers’ compensation reinsurance programs.
Health Insurance
We offer our NET Services’, certain WD Services’ and corporate employees an option to participate in a self-funded health insurance program. The liability for the self-funded health plan of $2.4$1.9 million and $3.0$2.2 million as of SeptemberJune 30, 20172019 and December 31, 2016,2018, respectively, was recorded in “Reinsurance liability and related reserve”liability reserves” in our condensed consolidated balance sheets.
Off-Balance Sheet Arrangements
There have been no material changes to the Off-Balance Sheet Arrangements discussion previously disclosed in our audited consolidated financial statements contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2018 other than the adoption of ASC 842, effective January 1, 2019, whereby the Company recorded $23,165 and$24,491 of additional leased assets and liabilities, respectively, on its condensed consolidated balance sheet. The adoption did not have a material impact on the statement of operations. See Note 9, Leases, for further information.
Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain statements that may be deemed “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933 (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), including statements related to the Company’s strategies or expectations about revenues, liabilities, results of operations, cash flows, ability to fund operations, profitability, ability to meet financial covenants, contracts or market opportunities. The Company may also make forward-looking statements in other reports filed with the Securities and Exchange Commission (the “SEC”), in materials delivered to stockholders and in press releases. In addition, the Company’s representatives may from time to time make oral forward-looking statements. In certain cases, you may identify forward looking-statements by words such as “may”, “will”, “should”, “could”, “expect”, “plan”, “project”, “intend”, “anticipate”, “believe”, “seek”, “estimate”, “predict”, “potential”, “target”, “forecast”, “likely”, the negative of such terms or comparable terminology. In addition, statements that are not historical statements of fact should also be considered forward-looking statements. These forward-looking statements are based on the Company’s current expectations, assumptions, estimates and projections about its business and industry, and involve risks, uncertainties and other factors that may cause actual events to be materially different from those expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, the risks disclosed in our Annual Report on Form 10-K for the year ended December 31, 20162018 and our other filings with the SEC.
You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. The Company is under no obligation to (and expressly disclaims any such obligation to) update any of the information in any forward-looking statement if such forward-looking statement later turns out to be inaccurate, whether as a result of new information, future events or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Foreign currencyWe have exposure to interest rate risk
As of September 30, 2017, we conducted business in eleven countries outside the U.S. As a result, mainly related to our cash flows and earnings are subject to fluctuations due to changes in foreign currency exchange rates.Credit Facility, which has variable interest rates that may increase. We do not currently hedge against the possible impact of currency fluctuations. During YTD 2017 we generated $217.4 million of our net operating revenues from operations outside the U.S. As we expand further into international markets, we expect the risk from foreign currency exchange rates to increase.
A 10% adverse change in the foreign currency exchange rate from British Pounds to U.S. dollars would have a $14.4 million negative impact on consolidated revenue and a negligible impact on net income. A 10% adverse change in other foreign currency exchange rates woulddid not have a significant impactany amounts outstanding on our financial results.Credit Facility at June 30, 2019.
We assess the significance of foreign currency risk on a periodic basis and may implement strategies to manage such risk as we deem appropriate.
Item 4. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures
The Company, under the supervision and with the participation of its management (including its principal executive officer and principal financial officer), evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as defined in Rule 13a-15(e) of the Exchange Act as of SeptemberJune 30, 2017.2019. Based upon this evaluation, the Company’s principal executive and financial officers have concluded that such disclosure controls and procedures were effective to provide reasonable assurance that (i) information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in internal controlscontrol over financial reporting
The principal executive and financial officers also conducted an evaluation of whether any changes in the Company’s internal control over financial reporting occurred during the quarter ended SeptemberJune 30, 20172019 that have materially affected or which are reasonably likely to materially affect such control. Such officers have concludedExcept as set forth below, there were no changes in our internal control over financial reporting identified in management’s evaluation pursuant to Rules 13a-15(d) of the Exchange Act during the period covered by this Quarterly Report on Form 10-Q that no such changes have occurred.materially affected, or are reasonably likely to materially affect, our internal control over financing reporting.
During the first quarter of 2019, the Company implemented new internal controls and processes related to its adoption of ASC 842.
(c) Limitations on the effectiveness of controls
Because of its inherent limitations, internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation and presentation. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate. The Company conducts periodic evaluations of its internal controls to enhance, where necessary, its procedures and controls.
PART II—OTHER INFORMATION
Item 1. Legal Proceedings.
From time-to-time, we may become involved in legal proceedings arising in the ordinary course of our business. We cannot predict with certainty the potential for or outcome of any future litigation. Regardless of the outcome of any particular litigation and the merits of any particular claim, litigation can have a material adverse impact on our company due to, among other reasons, any injunctive relief granted which could inhibit our ability to operate our business, amounts paid as damages or in settlement of any such matter, diversion of management resources and defense costs.
On June 15, 2015,January 21, 2019, the United States District Court for the Southern District of Ohio unsealed a putative stockholder class action derivativequi tam complaint, was filed in December 2015, against Mobile Care Group, Inc., Mobile Care Group of Ohio, LLC, Mobile Care EMS & Transport, Inc. and LogistiCare Solutions, LLC (“LogistiCare”) by Brandee White, Laura Cunningham, and Jeffery Wisier (the “Relators”) alleging violations of the Courtfederal False Claims Act by presenting claims for payment to government healthcare programs knowing that the prerequisites for such claims to be paid had not been met. The Relators seek to recover damages, fees and costs under the federal False Claims Act including treble damages, civil penalties and attorneys’ fees. In addition, the Relators seek reinstatement to their jobs with the Mobile Care entities. None of Chancerythe Relators was employed by LogistiCare. Prior to January 21, 2019, LogistiCare had no knowledge of the complaint. The federal government has declined to intervene against LogistiCare. The Company intends to defend the litigation vigorously and believes that the case will not have a material adverse effect on its business, financial condition or results of operations.
On March 1, 2019, Meher Patel filed suit against the Company in the Superior Court of the State of Delaware (the “Court”), captioned Haverhill Retirement System v. Kerley et al., C.A. No. 11149-VCL. For further informationCalifornia, Tuolumne County, on this legal proceeding, please see Item 3, Legal Proceedings, inbehalf of herself and as a class action on behalf of others similarly situated, asserting violations under the Company’s Annual Report on Form 10-K forCalifornia Labor Code relating to the year ended December 31, 2016,alleged failure by LogistiCare to comply with certain applicable state wage and Part II, Item 1, Legal Proceedings, inrelated employment requirements, as well as claims of breach of contract and breach of the Company’s Quarterly Reports on Form 10-Q for the periods ended March 31, 2017implied covenant of good faith and June 30, 2017.
On September 28, 2017, the Court approved a proposed settlement agreement among the parties that provides for a settlementfair dealing. The plaintiff seeks to recover an unspecified amount of $10.0 million less plaintiff’s legal feesdamages and expenses (the “Settlement Amount”), with 75%penalties, as well as certification as a class action. No amounts have been accrued for any potential losses under this matter, as management cannot reasonably predict the outcome of the Settlement Amount to be paid to the Company and 25% of the Settlement Amount to be paid to holders of the Company’s common stock other than certain excluded parties.litigation or any potential losses. The Company expectsintends to receivedefend the litigation vigorously and believes that the case will not have a paymentmaterial adverse effect on its business, financial condition or results of approximately $5.0 million. As this amount is considered a gain contingency, the Company has not recorded a receivable for this amount as of September 30, 2017.operations.
Item 1A. Risk Factors.
There have been no material changes from the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.2018.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Issuer Purchases of Equity Securities
The following table provides information with respect to common stock repurchased by us during the three months ended SeptemberJune 30, 2017:2019:
| | | Period | | Total Number of Shares of Common Stock Purchased (1) | | Average Price Paid per Share | | Total Number of Shares of Common Stock Purchased as Part of Publicly Announced Plans or Program | | Maximum Dollar Value of Shares of Common Stock that May Yet Be Purchased Under the Plans or Program (2) | | Total Number of Shares of Common Stock Purchased (1) | | Average Price Paid per Share | | Total Number of Shares (or Units) of Common Stock Purchased as Part of Publicly Announced Plans or Program | | Maximum Dollar Value of
Shares (or Units) that May Yet Be Purchased
Under the Plans or Program (000’s) (2) |
| Month 1: | | | | | | | | | | | | | | | | |
| July 1, 2017 | | | | | | | | | |
| April 1, 2019 | | | | | | | | | |
| to | | | | | | | | | | | | | | | | |
| July 31, 2017 | | 47 |
| | $ | 50 |
| | — |
| | $ | 69,624,167 |
| |
| April 30, 2019 | | | 164 |
| | $ | 66.16 |
| | — |
| | $ | 81,177 |
|
| | | | | | | | | | | | | | | | | |
| Month 2: | | | | | | | | | | | | | | | | |
| August 1, 2017 | | | | | | | | | |
| May 1, 2019 | | | | | | | | | |
| to | | | | | | | | | | | | | | | | |
| August 31, 2017 | | 115 |
| | $ | 51.54 |
| | — |
| | $ | 69,624,167 |
| |
| May 31, 2019 | | | 2,255 |
| | $ | 67.16 |
| | — |
| | $ | 81,177 |
|
| | | | | | | | | | | | | | | | | |
| Month 3: | | | | | | | | | | | | | | | | |
| September 1, 2017 | | | | | | | | | |
| June 1, 2019 | | | | | | | | | |
| to | | | | | | | | | | | | | | | | |
| September 30, 2017 | | — |
| | $ | — |
| | — |
| | $ | 69,624,167 |
| |
| June 30, 2019 | | | — |
| | $ | — |
| | — |
| | $ | — |
|
| | | | | | | | | | | | | | | | | |
| Total | | 162 |
| | |
| | — |
| | |
| | 2,419 |
| | | | — |
| | |
|
______________
| |
| (1) | Includes shares repurchased from employees in connection with the settlement of income tax and related benefit withholding obligations arising from vesting of restricted stock grants. |
| |
| (2) | On October 26, 2016, our Board authorized a new repurchase program, under which the Company may repurchase up to $100.0 million in aggregate value of the Company’s common stockCommon Stock during the twelve-month period following October 26, 2016. AsOn November 2, 2017, our Board approved the extension of Septemberthe Company’s prior stock repurchase program, authorizing the Company to engage in a repurchase program to repurchase up to $69.6 million (the amount remaining from the $100.0 million repurchase amount authorized in 2016) in aggregate value of our Common Stock through December 31, 2018. Subsequently, on March 29, 2018, our Board authorized an increase in the amount available for stock repurchases under the Company’s existing stock repurchase program by $77.8 million, and extended the existing stock repurchase program through June 30, 2017, a total of 770,808 shares were purchased through this plan for $30.4 million, including commission payments.2019. |
On November 2, 2017,A total of 1.8 million shares have been repurchased since the Company’s Board of Directorsoriginally approved the extension of the Company’s existing stock repurchase program authorizing the Company to engage in a common stock repurchase program to repurchase up to $69.6 million (the amount remaining from the $100.0 million repurchase amount authorized in 2016) in aggregate value of the Company’s common stock through December 31, 2018. Purchases under the common stock repurchase program may beon October 26, 2016. The share repurchases were made from time-to-time through a combination of open market repurchases (including Rule 10b5-1 plans), privately negotiated transactions, and accelerated share repurchase transactions atand other derivative transactions. As of June 30, 2019, thisrepurchase program expired.
Subsequent to June 30, 2019, the discretionBoard authorized a new stock repurchase program under which the Company may repurchase up to $100.0 million in aggregate value of the Company’s officers, and as permitted by securities laws, covenants under existing bank agreements, and other legal requirements.Common Stock, subject to the consent of the holders of a majority of the Company’s Series A convertible preferred stock, through December 31, 2019, unless terminated earlier.
Dividends
We have not paid any cash dividends on our common stock and currently do not expect to pay dividends on our common stock. In addition, our ability to pay dividends on our common stock is limited by the terms of our Credit Agreement and our preferred stock. The payment of future cash dividends, if any, will be reviewed periodically by the Board and will depend upon, among other things, our financial condition, funds from operations, the level of our capital and development expenditures, any restrictions imposed by present or future debt or equity instruments, and changes in federal tax policies, if any.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
Item 5. Other Information.
None.
Item 6. Exhibits.
EXHIBIT INDEX
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Exhibit Number | | Description |
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| 31.1* | | |
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| 31.2* | | |
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| 32.1* | | |
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| 32.2* | | |
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101. INS101.INS | | XBRLXBR Instance Document |
| | - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
| 101.SCH | | XBRL Schema Document |
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| 101.CAL | | XBRL Calculation Linkbase Document |
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| 101.LAB | | XBRL Label Linkbase Document |
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| 101.PRE | | XBRL Presentation Linkbase Document |
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| 101.DEF | | XBRL Definition Linkbase Document |
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| + | Management contract of compensatory plan or arrangement. |
| * | Filed herewith. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | |
| | THE PROVIDENCE SERVICE CORPORATION |
| | | |
Date: NovemberAugust 8, 20172019 | By: | /s/ James M. LindstromR. Carter Pate |
| | | James M. LindstromR. Carter Pate
Interim Chief ExecutiveOfficer and Director |
| | | (Principal Executive Officer) |
| | | |
Date: NovemberAugust 8, 20172019 | By: | /s/ David C. ShackeltonKevin Dotts |
| | | David C. ShackeltonKevin Dotts
Chief Financial Officer |
| | | (Principal Financial Officer) |