UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2014
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-34221
The Providence Service Corporation
(Exact name of registrant as specified in its charter)
Delaware |
| 86-0845127 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
64 East Broadway Blvd., Tucson, Arizona |
| 85701 |
(Address of principal executive offices) |
| (Zip Code) |
(520) 747-6600
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☒ |
| Non-accelerated filer ☐ | Smaller reporting company ☐ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
As of November 5, 2013,May 6, 2014, there were outstanding 13,504,35213,961,932 shares (excluding treasury shares of 952,776)973,564) of the registrant’s Common Stock, $0.001 par value per share.
TABLE OF CONTENTS
| Page | ||||
PART I—FINANCIAL INFORMATION | |||||
Item 1. | Financial Statements | 3 | |||
Condensed Consolidated Balance Sheets – | 3 | ||||
Unaudited Condensed Consolidated Statements of Income – Three months ended March 31, 2014 and 2013 | 4 | ||||
| |||||
Unaudited Condensed Consolidated Statements of Comprehensive Income – Three | 5 | ||||
Unaudited Condensed Consolidated Statements of Cash Flows – Three months ended March 31, 2014 and 2013 | 6 | ||||
Notes to Unaudited Condensed Consolidated Financial Statements | March 31, 2014 | 7 | |||
| |||||
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | ||||
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | ||||
Item 4. | Controls and Procedures | ||||
PART II—OTHER INFORMATION | |||||
Item | Risk Factors | 23 | |||
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | ||||
Item 6. | Exhibits |
PART I—FINANCIAL INFORMATION
Item 1. |
|
The Providence Service Corporation
Condensed Consolidated Balance Sheets
(in thousands except share and per share data)
September 30, 2013 | December 31, 2012 | |||||||
Assets | (Unaudited) | |||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 91,103 | $ | 55,863 | ||||
Accounts receivable, net of allowance of$4.4 million in 2013 and $3.7 million in 2012 | 91,245 | 98,628 | ||||||
Management fee receivable | 2,309 | 2,662 | ||||||
Other receivables | 1,683 | 1,920 | ||||||
Restricted cash | 3,837 | 1,787 | ||||||
Prepaid expenses and other | 19,577 | 14,807 | ||||||
Deferred tax assets | 130 | 532 | ||||||
Total current assets | 209,884 | 176,199 | ||||||
Property and equipment, net | 30,886 | 30,380 | ||||||
Goodwill | 113,345 | 113,915 | ||||||
Intangible assets, net | 44,250 | 49,651 | ||||||
Restricted cash, less current portion | 14,198 | 10,953 | ||||||
Other assets | 12,318 | 10,639 | ||||||
Total assets | $ | 424,881 | $ | 391,737 | ||||
Liabilities and stockholders' equity | ||||||||
Current liabilities: | ||||||||
Current portion of long-term obligations | $ | 47,500 | $ | 14,000 | ||||
Accounts payable | 4,543 | 4,569 | ||||||
Accrued expenses | 48,766 | 32,976 | ||||||
Accrued transportation costs | 56,410 | 61,316 | ||||||
Deferred revenue | 5,263 | 7,055 | ||||||
Reinsurance liability reserve | 13,159 | 12,713 | ||||||
Total current liabilities | 175,641 | 132,629 | ||||||
Long-term obligations, less current portion | 76,000 | 116,000 | ||||||
Other long-term liabilities | 15,736 | 13,527 | ||||||
Deferred tax liabilities | 11,683 | 10,894 | ||||||
Total liabilities | 279,060 | 273,050 | ||||||
Commitments and contingencies (Note 13) | ||||||||
Stockholders' equity | ||||||||
Common stock: Authorized 40,000,000 shares; $0.001 parvalue; 14,426,603 and 13,785,947 issued and outstanding(including treasury shares) | 14 | 14 | ||||||
Additional paid-in capital | 192,547 | 180,778 | ||||||
Accumulated deficit | (36,998 | ) | (53,079 | ) | ||||
Accumulated other comprehensive loss, net of tax | (1,155 | ) | (893 | ) | ||||
Treasury shares, at cost, 952,776 and 928,478 shares | (15,548 | ) | (15,094 | ) | ||||
Total Providence stockholders' equity | 138,860 | 111,726 | ||||||
Non-controlling interest | 6,961 | 6,961 | ||||||
Total stockholders' equity | 145,821 | 118,687 | ||||||
Total liabilities and stockholders' equity | $ | 424,881 | $ | 391,737 |
March 31, | December 31, | |||||||
2014 | 2013 | |||||||
Assets | (Unaudited) | |||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 105,840 | $ | 98,995 | ||||
Accounts receivable, net of allowance of$3.9 million in 2014 and $4.2 million in 2013 | 100,275 | 88,315 | ||||||
Other receivables | 5,624 | 6,607 | ||||||
Prepaid expenses and other | 8,560 | 11,831 | ||||||
Restricted cash | 2,883 | 3,772 | ||||||
Deferred tax assets | 2,932 | 2,152 | ||||||
Total current assets | 226,114 | 211,672 | ||||||
Property and equipment, net | 33,321 | 32,709 | ||||||
Goodwill | 113,154 | 113,263 | ||||||
Intangible assets, net | 41,831 | 43,476 | ||||||
Other assets | 8,869 | 11,681 | ||||||
Restricted cash, less current portion | 11,433 | 11,957 | ||||||
Total assets | $ | 434,722 | $ | 424,758 | ||||
Liabilities and stockholders' equity | ||||||||
Current liabilities: | ||||||||
Current portion of long-term obligations | $ | 49,000 | $ | 48,250 | ||||
Accounts payable | 5,314 | 3,904 | ||||||
Accrued expenses | 59,916 | 52,484 | ||||||
Accrued transportation costs | 54,864 | 54,962 | ||||||
Deferred revenue | 3,818 | 3,687 | ||||||
Reinsurance liability reserve | 7,694 | 10,778 | ||||||
Total current liabilities | 180,606 | 174,065 | ||||||
Long-term obligations, less current portion | 74,500 | 75,250 | ||||||
Other long-term liabilities | 13,313 | 15,359 | ||||||
Deferred tax liabilities | 8,894 | 9,447 | ||||||
Total liabilities | 277,313 | 274,121 | ||||||
Commitments and contingencies (Note 8) | ||||||||
Stockholders' equity | ||||||||
Common stock: Authorized 40,000,000 shares; $0.001 parvalue; 14,556,544 and 14,477,312 issued and outstanding(including treasury shares) | 15 | 14 | ||||||
Additional paid-in capital | 195,581 | 194,363 | ||||||
Accumulated deficit | (27,354 | ) | (33,641 | ) | ||||
Accumulated other comprehensive loss, net of tax | (1,683 | ) | (1,419 | ) | ||||
Treasury shares, at cost, 973,564 and 956,442 shares | (16,111 | ) | (15,641 | ) | ||||
Total Providence stockholders' equity | 150,448 | 143,676 | ||||||
Non-controlling interest | 6,961 | 6,961 | ||||||
Total stockholders' equity | 157,409 | 150,637 | ||||||
Total liabilities and stockholders' equity | $ | 434,722 | $ | 424,758 |
See accompanying notes to unaudited condensed consolidated financial statements
The Providence Service Corporation
Unaudited Condensed Consolidated Statements of Income
(in thousands except share and per share data)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Revenues: | ||||||||||||||||
Human services | $ | 84,702 | $ | 83,950 | $ | 262,809 | $ | 269,526 | ||||||||
Non-emergency transportation services | 192,011 | 196,335 | 583,028 | 549,844 | ||||||||||||
276,713 | 280,285 | 845,837 | 819,370 | |||||||||||||
Operating expenses: | ||||||||||||||||
Client service expense | 76,881 | 73,462 | 228,695 | 230,200 | ||||||||||||
Cost of non-emergency transportation services | 177,049 | 183,248 | 536,664 | 520,866 | ||||||||||||
General and administrative expense | 11,082 | 12,069 | 36,265 | 38,599 | ||||||||||||
Asset impairment charge | 0 | 2,506 | 492 | 2,506 | ||||||||||||
Depreciation and amortization | 3,725 | 4,018 | 11,188 | 11,254 | ||||||||||||
Total operating expenses | 268,737 | 275,303 | 813,304 | 803,425 | ||||||||||||
Operating income | 7,976 | 4,982 | 32,533 | 15,945 | ||||||||||||
Other (income) expense: | ||||||||||||||||
Interest expense | 1,916 | 1,990 | 5,407 | 5,806 | ||||||||||||
Loss on extinguishment of debt | 525 | 0 | 525 | 0 | ||||||||||||
Interest income | (40 | ) | (25 | ) | (92 | ) | (109 | ) | ||||||||
Income before income taxes | 5,575 | 3,017 | 26,693 | 10,248 | ||||||||||||
Provision for income taxes | 2,048 | 1,859 | 10,612 | 4,631 | ||||||||||||
Net income | $ | 3,527 | $ | 1,158 | $ | 16,081 | $ | 5,617 | ||||||||
Earnings per common share: | ||||||||||||||||
Basic | $ | 0.26 | $ | 0.09 | $ | 1.20 | $ | 0.42 | ||||||||
Diluted | $ | 0.25 | $ | 0.09 | $ | 1.17 | $ | 0.42 | ||||||||
Weighted-average number of commonshares outstanding: | ||||||||||||||||
Basic | 13,674,467 | 13,263,826 | 13,411,204 | 13,277,191 | ||||||||||||
Diluted | 14,049,329 | 13,342,614 | 13,711,124 | 13,388,355 |
Three months ended | ||||||||
March 31, | ||||||||
2014 | 2013 | |||||||
Revenues: | ||||||||
Non-emergency transportation services | $ | 198,077 | $ | 193,133 | ||||
Human services | 91,326 | 88,354 | ||||||
Total revenues | 289,403 | 281,487 | ||||||
Operating expenses: | ||||||||
Cost of non-emergency transportation services | 175,230 | 176,684 | ||||||
Client service expense | 84,748 | 75,517 | ||||||
General and administrative expense | 13,617 | 12,452 | ||||||
Depreciation and amortization | 3,728 | 3,729 | ||||||
Total operating expenses | 277,323 | 268,382 | ||||||
Operating income | 12,080 | 13,105 | ||||||
Other expense: | ||||||||
Interest expense, net | 1,585 | 1,751 | ||||||
Income before income taxes | 10,495 | 11,354 | ||||||
Provision for income taxes | 4,208 | 4,676 | ||||||
Net income | $ | 6,287 | $ | 6,678 | ||||
Earnings per common share: | ||||||||
Basic | $ | 0.45 | $ | 0.51 | ||||
Diluted | $ | 0.44 | $ | 0.49 | ||||
Weighted-average number of commonshares outstanding: | ||||||||
Basic | 13,801,456 | 13,148,717 | ||||||
Diluted | 15,257,577 | 14,507,367 |
See accompanying notes to unaudited condensed consolidated financial statements
The Providence Service Corporation
Unaudited Condensed Consolidated Statements of Comprehensive Income
(in thousands)
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Net income | $ | 3,527 | $ | 1,158 | $ | 16,081 | $ | 5,617 | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Foreign currency translation adjustments | 153 | 395 | (262 | ) | 340 | |||||||||||
Comprehensive income | $ | 3,680 | $ | 1,553 | $ | 15,819 | $ | 5,957 |
Three months ended | ||||||||
March 31, | ||||||||
2014 | 2013 | |||||||
Net income | $ | 6,287 | $ | 6,678 | ||||
Other comprehensive loss: | ||||||||
Foreign currency translation adjustments | (264 | ) | (160 | ) | ||||
Comprehensive income | $ | 6,023 | $ | 6,518 |
See accompanying notes to unaudited condensed consolidated financial statements
The Providence Service Corporation
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
Nine months ended September 30, | ||||||||
2013 | 2012 | |||||||
Operating activities | ||||||||
Net income | $ | 16,081 | $ | 5,617 | ||||
Adjustments to reconcile net income to net cashprovided by operating activities: | ||||||||
Depreciation | 5,802 | 5,578 | ||||||
Amortization | 5,386 | 5,676 | ||||||
Amortization of deferred financing costs | 746 | 865 | ||||||
Loss on extinguishment of debt | 525 | 0 | ||||||
Provision for doubtful accounts | 2,570 | 1,418 | ||||||
Deferred income taxes | 1,395 | (420 | ) | |||||
Stock based compensation | 2,402 | 3,586 | ||||||
Excess tax benefit upon exercise of stock options | (999 | ) | (60 | ) | ||||
Asset impairment charge | 492 | 2,506 | ||||||
Other | 352 | (33 | ) | |||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | 5,033 | (10,304 | ) | |||||
Management fee receivable | 105 | 849 | ||||||
Other receivables | 237 | (509 | ) | |||||
Restricted cash | (255 | ) | 14 | |||||
Prepaid expenses and other | (6,031 | ) | (3,556 | ) | ||||
Reinsurance liability reserve | 2,720 | 1,773 | ||||||
Accounts payable and accrued expenses | 15,744 | 3,040 | ||||||
Accrued transportation costs | (4,906 | ) | 16,901 | |||||
Deferred revenue | (1,792 | ) | 3,639 | |||||
Other long-term liabilities | 52 | 3,357 | ||||||
Net cash provided by operating activities | 45,659 | 39,937 | ||||||
Investing activities | ||||||||
Purchase of property and equipment, net | (6,413 | ) | (7,565 | ) | ||||
Acquisition of businesses, net of cash acquired | 0 | (190 | ) | |||||
Restricted cash for reinsured claims losses | (5,040 | ) | 1,269 | |||||
Purchase of short-term investments, net | (23 | ) | 452 | |||||
Net cash used in investing activities | (11,476 | ) | (6,034 | ) | ||||
Financing activities | ||||||||
Repurchase of common stock, for treasury | (454 | ) | (3,658 | ) | ||||
Proceeds from common stock issued pursuant to stockoption exercise | 9,244 | 258 | ||||||
Excess tax benefit upon exercise of stock options | 999 | 60 | ||||||
Proceeds from long-term debt | 76,000 | 0 | ||||||
Repayment of long-term debt | (82,500 | ) | (9,993 | ) | ||||
Debt financing costs | (2,083 | ) | (53 | ) | ||||
Capital lease payments | (8 | ) | (20 | ) | ||||
Net cash provided by (used in) financing activities | 1,198 | (13,406 | ) | |||||
Effect of exchange rate changes on cash | (141 | ) | 76 | |||||
Net change in cash | 35,240 | 20,573 | ||||||
Cash at beginning of period | 55,863 | 43,184 | ||||||
Cash at end of period | $ | 91,103 | $ | 63,757 | ||||
Supplemental cash flow information: | ||||||||
Cash paid for interest | $ | 3,504 | $ | 4,133 | ||||
Cash paid for income taxes | $ | 10,791 | $ | 6,167 |
Three months ended March 31, | ||||||||
2014 | 2013 | |||||||
Operating activities | ||||||||
Net income | $ | 6,287 | $ | 6,678 | ||||
Adjustments to reconcile net income to net cashprovided by operating activities: | ||||||||
Depreciation | 2,103 | 1,934 | ||||||
Amortization | 1,625 | 1,795 | ||||||
Provision for doubtful accounts | 557 | 558 | ||||||
Stock based compensation | 408 | 918 | ||||||
Deferred income taxes | (1,333 | ) | (21 | ) | ||||
Amortization of deferred financing costs | 214 | 264 | ||||||
Excess tax benefit upon exercise of stock options | (323 | ) | (158 | ) | ||||
Other non-cash charges | 35 | 22 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts receivable | (12,534 | ) | 8,905 | |||||
Other receivables | 984 | 10 | ||||||
Restricted cash | (111 | ) | (410 | ) | ||||
Prepaid expenses and other | 6,049 | (287 | ) | |||||
Reinsurance liability reserve | (1,950 | ) | (1,948 | ) | ||||
Accounts payable and accrued expenses | 8,862 | 11,349 | ||||||
Accrued transportation costs | (98 | ) | (2,059 | ) | ||||
Deferred revenue | 131 | 2,322 | ||||||
Other long-term liabilities | (3,060 | ) | (71 | ) | ||||
Net cash provided by operating activities | 7,846 | 29,801 | ||||||
Investing activities | ||||||||
Purchase of property and equipment | (2,723 | ) | (1,438 | ) | ||||
Net increase (decrease) in short-term investments | (5 | ) | (8 | ) | ||||
Restricted cash for reinsured claims losses | 1,525 | 46 | ||||||
Net cash used in investing activities | (1,203 | ) | (1,400 | ) | ||||
Financing activities | ||||||||
Repurchase of common stock, for treasury | (470 | ) | (384 | ) | ||||
Proceeds from common stock issued pursuant to stockoption exercise | 506 | 1,878 | ||||||
Excess tax benefit upon exercise of stock options | 323 | 158 | ||||||
Repayment of long-term debt | - | (2,750 | ) | |||||
Capital lease payments | (2 | ) | (3 | ) | ||||
Net cash provided by (used in) financing activities | 357 | (1,101 | ) | |||||
Effect of exchange rate changes on cash | (155 | ) | (83 | ) | ||||
Net change in cash | 6,845 | 27,217 | ||||||
Cash at beginning of period | 98,995 | 55,863 | ||||||
Cash at end of period | $ | 105,840 | $ | 83,080 | ||||
Supplemental cash flow information: | ||||||||
Cash paid for interest | $ | 619 | $ | 732 | ||||
Cash paid for income taxes | $ | 2,216 | $ | 1,770 |
See accompanying notes to unaudited condensed consolidated financial statements
The Providence Service Corporation
Notes to Unaudited Condensed Consolidated Financial Statements
September 30, 2013March 31, 2014
(in thousands except share and per share data)
1. Basis of Presentation and Description of Business and New Accounting Pronouncements
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements (the “consolidated financial statements”) include the accounts of The Providence Service Corporation and its wholly-owned subsidiaries, including its foreign wholly-owned subsidiary WCG International Ltd. (“WCG”). Unless the context otherwise requires, references to the “Company”, “our”,Company,” “our,” “we” and “us” mean The Providence Service Corporation) and its wholly-owned subsidiaries.
The Company’s consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“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 of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of recurring accruals) considered necessary for fair presentation have been included. In order to conform to the current year presentation, prior year amounts have been reclassified to show human services revenues as one line item.item, and interest expense and interest income as interest expense, net. Additionally, prior year management fee receivables have been included in other receivables for comparable presentation purposes.
The Company has made a number of estimates relating to the reporting of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with GAAP. Actual results could differ from those estimates. Operating results for the three and nine months ended September 30, 2013March 31, 2014 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2013.2014. Management has evaluated events and transactions that occurred after the balance sheet date and through the date these consolidated financial statements were issued, and considered the effect of such events in the preparation of these consolidated financial statements.
The consolidated balance sheet at December 31, 20122013 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements. The 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, 2012.2013.
Description of Business
The Company is aprovides and manages government outsourcing privatization company.sponsored human services and non-emergency transportation services. The Company operates in the following two segments:segments, Human Services and Non-Emergency Transportation Services (“NET Services”). During the third quarter of 2013, the Company changed the name of its Social Services segment to the Human Services segment. The name change was made as part of a rebranding effort to reflect the future vision of the Human Services business, and to better describe the broad spectrum of services it provides. TheIn our Human Services segment, respondsour counselors, social workers and behavioral health professionals work with clients who are eligible for government assistance due to governmental privatization initiativesincome level, emotional/educational disabilities or court order. We provide human services primarily in adult and juvenile justice, corrections, social services, welfare systems, education and workforce development by providingthe client’s home and community-based services and foster care services to at-risk families and children.or community. The NET Services segment provides non-emergencymanages transportation managementnetworks and arranges for client transportation to health care related facilities and services primarily tofor state or regional Medicaid agencies, managed care organizations (“MCOs”) and Medicare beneficiaries.commercial insurers. As of September 30, 2013,March 31, 2014, the Company operated in 4344 states and the District of Columbia in the United States and in British Columbia and Alberta,three provinces in Canada.
New Accounting Pronouncements
In February 2013, the FASB issued ASU 2013-02-Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”). ASU 2013-02 is intended to improve the reporting of reclassifications out of accumulated other comprehensive income. Accordingly, an entity is required to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. The amendments in this ASU supersede the presentation requirements for reclassifications out of accumulated other comprehensive income in ASU 2013-05 and ASU 2013-12. ASU 2013-02 is effective for reporting periods beginning after December 15, 2012. The Company adopted ASU 2013-02 effective January 1, 2013. The adoption of ASU 2013-02 did not have an effect on the consolidated financial statements.
2. Concentration of Credit Risk
Contracts with governmental agencies, and other entities that contract with governmental agencies, accounted for approximately 80%78.5% and 81%81.0% of the Company’s revenue for the ninethree months ended September 30,March 31, 2014 and 2013, and 2012, respectively. The contracts are subject to possible statutory and regulatory changes, rate adjustments, administrative rulings, rate freezes and funding reductions. Reductions in amounts paid under these contracts for the Company’s services or changes in methods or regulations governing payments for the Company’s services could materially adversely affect its revenue and profitability.
3. Restricted Cash
The Company had approximately $18.0 million and $12.7 million of restricted cash at September 30, 2013 and December 31, 2012, respectively, as follows (in thousands):
September 30, 2013 December 31, 2012 Collateral for letters of credit - Contractual obligations Contractual obligations Subtotal restricted cash for contractual obligations Collateral for letters of credit - Reinsured claims losses Escrow/Trust - Reinsured claims losses Subtotal restricted cash for reinsured claims losses Total restricted cash Less current portion $ 243 $ 243 953 698 1,196 941 3,033 5,634 13,806 6,165 16,839 11,799 18,035 12,740 3,837 1,787 $ 14,198 $ 10,953
Of the restricted cash amount at September 30, 2013 and December 31, 2012:
• $243,000 in both periods served as collateral for irrevocable standby letters of credit that provide financial assurance that the Company will fulfill certain contractual obligations;
• approximately $953,000 and $698,000, respectively, was held to fund the Company’s obligations under arrangements with various governmental agencies through the correctional services business;
• approximately $3.0 million and $5.6 million, respectively, served as collateral for irrevocable standby letters of credit to secure any reinsured claims losses under the Company’s workers’ compensation reinsurance;
• approximately $5.1 million in both periods was restricted and held in trust for historical reinsurance claims losses under the Company’s general and professional liability reinsurance program;
• approximately $750,000 and $1.1 million, respectively, was restricted for our historical auto liability program; and
• approximately $8.0 million was restricted and held in a trust at September 30, 2013 for reinsurance claims losses under the Company’s workers’ compensation, general and professional liability and auto liability reinsurance programs.
4. Prepaid Expenses and Other
Prepaid expenses and other were comprised of the following (in thousands):
September 30, 2013 December 31, 2012 Prepaid payroll Prepaid insurance Prepaid taxes Prepaid rent Prepaid bus tokens and passes Prepaid maintenance agreements and copier leases Interest receivable - certificates of deposit Other Total prepaid expenses and other $ 295 $ 2,494 7,111 3,739 2,881 1,358 1,531 1,067 1,254 1,224 1,135 723 702 679 4,668 3,523 $ 19,577 $ 14,807
5. Goodwill and Intangibles
Goodwill
In accordance with ASC 350,“Intangibles-Goodwill and Other” (“ASC 350”), the Company applies a fair value-based impairment test to the net book value of goodwill and indefinite-lived intangible assets on an annual basis and, if certain events or circumstances indicate that an impairment loss may have been incurred, on an interim basis. The analysis of potential impairment of goodwill requires a two-step process. The first step is the estimation of fair value. If step one indicates that an impairment potentially exists, the second step is performed to measure the amount of impairment, if any. Goodwill impairment exists when the estimated fair value of goodwill is less than its carrying value.
During the quarter ended June 30, 2013, the not-for-profit entities managed by Rio Grande Management Company, L.L.C. (“Rio”), a wholly-owned subsidiary of the Company, were notified of the termination of funding for some or all of their services. Management expects that due to this change in funding, the not-for-profit entities will not be able to maintain the level of business they historically experienced, which is expected to result in the decrease, or elimination of, services provided by Rio to these entities. The Company determined that these factors were indicators that an interim goodwill impairment test was required under ASC 350. As a result, the Company estimated the fair value of the goodwill it acquired in connection with the Rio acquisition to be zero at June 30, 2013, and at that time, the Company recorded a non-cash charge of approximately $492,000 in its Human Services operating segment to eliminate the carrying value of goodwill acquired in connection with its acquisition of Rio. This charge was included in “Asset impairment charge” in the accompanying condensed consolidated statements of income for the nine months ended September 30, 2013.
Intangible Assets
During the first nine months of 2012, WCG experienced a decline in its business due to the impact of a reorganization of the service delivery system in British Columbia, which began in early 2012. As part of this reorganization, all of the contracts for services in this market expired and new contracts were put up for bid. Due to an increased level of competition in British Columbia and a decrease in the number of services funded, WCG was unable to regain the level of business it enjoyed prior to the reorganization. The impact of this service delivery system reorganization was not fully realized until the conclusion of the transition to the new system in the third quarter of 2012 and contributed to a decrease in the financial results of operations of WCG for 2012.
The Company determined that the value of the customer relationships obtained through the acquisition of WCG was impaired as of September 30, 2012. Consequently, the Company recorded a non-cash charge of approximately $2.5 million in its Human Services operating segment to reduce the carrying value of customer relationships acquired in connection with its acquisition of WCG based on their revised estimated fair values. In estimating the fair values of these intangible assets, the Company based its estimates on a projected discounted cash flow basis. This charge was included in “Asset impairment charge” in the accompanying condensed consolidated statements of income for the three and nine month periods ending September 30, 2012.
6.3. Accrued Expenses
Accrued expenses consisted of the following (in thousands):following:
September 30, 2013 December 31, 2012 Accrued compensation NET Services contract adjustments Other $ 20,418 $ 18,438 12,767 3,119 15,581 11,419 $ 48,766 $ 32,976
7. Long-Term Obligations
The Company’s long-term obligations consisted of the following (in thousands):
September 30, 2013 December 30, 2012 6.5% convertible senior subordinated notes, interest payable semi-annuallybeginning May 2008 with principal due May 2014 (the "Notes") $40,000 revolving loan, LIBOR plus 2.75% that was terminated in August 2013 $100,000 term loan, LIBOR plus 2.75% with principal and interest payableat least once every three months that was terminated in August 2013 $165,000 revolving loan, LIBOR plus 1.75% - 2.50% (effective rate of 2.43% atSeptember 30, 2013) through August 2018 with interest payable at least once every three months $60,000 term loan, LIBOR plus 1.75% - 2.50%, with principal payable quarterlybeginning December 31, 2014 and interest payable at least once every three months, through August 2018 Less current portion $ 47,500 $ 47,500 0 0 0 82,500 16,000 0 60,000 0 123,500 130,000 47,500 14,000 $ 76,000 $ 116,000
The carrying amount of the long-term obligations approximated their fair value at September 30, 2013 and December 31, 2012. The fair value of the Company’s long-term obligations was estimated based on interest rates for the same or similar debt offered to the Company having same or similar remaining maturities and collateral requirements.
March 31, | December 31, | |||||||
2014 | 2013 | |||||||
Accrued compensation | $ | 21,033 | $ | 22,940 | ||||
NET Services contract adjustments | 16,481 | 12,445 | ||||||
Other | 22,402 | 17,099 | ||||||
$ | 59,916 | $ | 52,484 |
On August 2, 2013, the Company entered into an Amended and Restated Credit Agreement with Bank of America, N.A., as administrative agent, swing line lender and letter of credit issuer, SunTrust Bank, as syndication agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated and SunTrust Robinson Humphrey, Inc., as joint lead arrangers and joint book managers and other lenders party thereto. The Amended and Restated Credit Agreement provides the Company with a senior secured credit facility (“New Senior Credit Facility”), in aggregate principal amount of $225.0 million, comprised of a $60.0 million term loan facility and a $165.0 million revolving credit facility. There is an option to increase the amount of the term loan facility and/or the revolving credit facility by an aggregate amount of up to $75.0 million, as described below. The New Senior Credit Facility includes sublimits for swingline loans and letters of credit in amounts of up to $10.0 million and $25.0 million, respectively. On August 2, 2013, the Company borrowed the entire amount available under the term loan facility and $16.0 million under the revolving credit facility and used the proceeds thereof to refinance certain of the Company’s existing indebtedness. Prospectively, the proceeds of the New Senior Credit Facility may be used to (i) fund ongoing working capital requirements; (ii) make capital expenditures; (iii) repay the Notes; and (iv) other general corporate purposes.
Under the New Senior Credit Facility, the Company has an option to request an increase in the amount of the revolving credit facility and/or the term loan facility from time to time (on substantially the same terms as apply to the existing facilities) in an aggregate amount of up to $75.0 million with either additional commitments from lenders under the Amended and Restated 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 New Senior Credit Facility.
The New Senior Credit Facility matures on August 2, 2018. The Company may prepay the New Senior Credit Facility 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 (“LIBOR”) loans. The unutilized portion of the commitments under the New Senior Credit Facility may be irrevocably reduced or terminated by us at any time without penalty.
Interest on the outstanding principal amount of the loans accrues, at the Company’s election, at a per annum rate equal to LIBOR, plus an applicable margin or the base rate plus an applicable margin. The applicable margin ranges from 1.75% to 2.50% in the case of LIBOR loans and 0.75% to 1.50% in the case of the base rate loans, in each case based on the Company’s consolidated leverage ratio as defined in the Amended and Restated Credit Agreement. Interest on the loans is payable quarterly in arrears. In addition, the Company is obligated to pay a quarterly commitment fee based on a percentage of the unused portion of each lender’s commitment under the revolving 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 ranges from 0.25% to 0.50% and 1.75% to 2.50%, respectively, in each case, based on the Company’s consolidated leverage ratio.
The term loan facility is subject to quarterly amortization payments, commencing on December 31, 2014, so that the following percentages of the term loan outstanding on the closing date plus the principal amount of any term loans funded pursuant to the increase option are repaid as follows: 5.0% between December 31, 2014 and September 30, 2015, 7.5% between December 31, 2015 and September 30, 2016, 10.0% between December 31, 2016 and September 30, 2017, 11.25% between December 31, 2017 and June 30, 2018 and the remaining balance at maturity. The New Senior Credit Facility also requires the Company (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.
The Amended and Restated Credit Agreement contains customary affirmative and negative covenants and events of default. The negative covenants include restrictions on the Company’s ability to, among other things, incur additional indebtedness, create liens, make investments, give guarantees, pay dividends, sell assets and merge and consolidate. The Company is subject to financial covenants, including consolidated net leverage and consolidated fixed charge covenants.
The Company’s obligations under the New Senior Credit Facility are guaranteed by all of its present and future domestic subsidiaries, excluding certain domestic subsidiaries, which include its insurance captives and not-for-profit subsidiaries. The Company’s, and each guarantor’s, obligations under its guaranty of the New Senior Credit Facility are secured by a first priority lien on substantially all of the Company’s respective assets, including a pledge of 100% of the issued and outstanding stock of its domestic subsidiaries and 65% of the issued and outstanding stock of its first tier foreign subsidiaries.
The Company incurred fees of approximately $2.1 million to refinance its long-term debt. The Company accounted for fees related to the refinancing of its long-term debt, as well as unamortized deferred financing fees related to the prior senior credit facility, under ASC 470-50 –Debt Modifications and Extinguishments. As both credit facilities were loan syndications, and a number of lenders participated in both credit facilities, the Company evaluated the accounting for financing fees on a lender by lender basis. Of the total amount of deferred financing fees related to the prior senior credit facility, approximately $849,000 will continue to be deferred and amortized and approximately $525,000 was expensed in the quarter ending September 30, 2013. Of the $2.1 million of fees incurred to refinance the long-term debt, approximately $1.8 million was deferred and will be amortized to interest expense and approximately $254,000 was expensed in the quarter ending September 30, 2013.
8. Business Segments
The Company operates in two reportable segments, and differentiates the segments based on the nature of the services they offer and the criteria in FASBAccounting Standards Codification Topic 280, “Segment Reporting”. The following describes each of the Company’s segments and its corporate services area.
Human Services. Human Services includes government sponsored social services consisting of home and community based, foster care and not-for-profit management services. These services are purchased primarily by state, county and city levels of government, and are delivered under block purchase, cost based and fee-for-service arrangements. The Company also contracts with not-for-profit organizations to provide management services for a fee.
NET Services. NET Services is comprised primarily of managing the delivery of non-emergency transportation services to Medicaid and Medicare beneficiaries. The entities that pay for non-emergency medical transportation services are primarily state Medicaid programs, health maintenance organizations and commercial insurers. Most of the Company’s non-emergency transportation services are delivered under capitated contracts where the Company assumes the responsibility of meeting the Medicaid covered benefit transportation needs of a specific geographic population.
The basis of segmentation and measurement of segment profit or loss has not changed from that disclosed in the Company’s audited financial statements and notes included in its Annual Report on Form 10-K for the year ended December 31, 2012.
The following table sets forth certain financial information (in thousands) attributable to the Company’s business segments for the three and nine months ended September 30, 2013 and 2012. In addition, none of the segments have significant non-cash items in operating income other than depreciation, amortization and asset impairment charges.
For the three months ended September 30, | For the nine months ended September 30, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Revenues: | ||||||||||||||||
Human Services (a) | $ | 84,702 | $ | 83,950 | $ | 262,809 | $ | 269,526 | ||||||||
NET Services | 192,011 | 196,335 | 583,028 | 549,844 | ||||||||||||
Consolidated | $ | 276,713 | $ | 280,285 | $ | 845,837 | $ | 819,370 | ||||||||
Operating income: | ||||||||||||||||
Human Services | $ | (1,484 | ) | $ | (3,071 | ) | $ | 2,281 | $ | 1,498 | ||||||
NET Services | 9,460 | 8,053 | 30,252 | 14,447 | ||||||||||||
Consolidated (b) | $ | 7,976 | $ | 4,982 | $ | 32,533 | $ | 15,945 |
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9.4. Stock-Based Compensation Arrangements
The Company issues both option awards and restricted stock to employees and non-employee directors. Option awards and restricted stock generally vest in three equal installments on the first, second and third anniversaries of the date of grant. The fair value expense of option awards was estimated on the date of grant using the Black-Scholes-Merton option-pricingBlack-Scholes option pricing formula and amortized over the option’s vesting periods, and the fair value of unvested restricted stock grants was determined based on the closing market price of the Company’s common stock on the date of grant. The following table summarizes the stock option activity:
For the nine months ended September 30, 2013 Number of Shares Under Option Weighted-average Exercise Price Balance at beginning of period Exercised Forfeited or expired Outstanding at September 30, 2013 1,724,421 $ 19.48 (551,601 ) 16.76 (251,875 ) 24.29 920,945 $ 19.80
For the three months ended March 31, 2014 | ||||||||
Number of Shares Under Option | Weighted-average Exercise Price | |||||||
Balance at beginning of period | 874,252 | $ | 19.76 | |||||
Exercised | (22,249 | ) | 22.76 | |||||
Forfeited or expired | (9,001 | ) | 27.87 | |||||
Outstanding at March 31, 2014 | 843,002 | $ | 19.60 |
The following table summarizes the activity of the shares and weighted-average grant date fair value of the Company’s unvested restricted common stock:
For the nine months ended September 30, 2013 Shares Weighted-average Grant Date Fair Value Non-vested balance at beginning of period Granted Vested Forfeited or cancelled Non-vested at September 30, 2013 225,744 $ 15.25 63,407 23.73 (89,055 ) 15.32 (19,350 ) 15.50 180,746 $ 17.59
For the three months ended March 31, 2014 | ||||||||
Shares | Weighted-average Grant Date Fair Value | |||||||
Non-vested balance at beginning of period | 158,842 | $ | 17.68 | |||||
Granted | 20,333 | 27.99 | ||||||
Vested | (56,983 | ) | 15.39 | |||||
Forfeited or cancelled | (14,439 | ) | 16.19 | |||||
Non-vested at March 31, 2014 | 107,753 | $ | 21.04 |
10.5. Stockholders’ Equity
The following table reflects changes in common stock, additional paid-in capital, treasury stock and accumulated other comprehensive loss for the ninethree months ended September 30, 2013 (in thousands except share data):March 31, 2014:
Accumulated | ||||||||||||||||||||||||
Additional | Other | |||||||||||||||||||||||
Common Stock | Paid-In | Treasury Stock | Comprehensive | |||||||||||||||||||||
Shares | Amount | Capital | Shares | Amount | Loss | |||||||||||||||||||
Balance at December 31, 2013 | 14,477,312 | $ | 14 | $ | 194,363 | 956,442 | $ | (15,641 | ) | $ | (1,419 | ) | ||||||||||||
Stock-based compensation | - | - | 408 | - | - | - | ||||||||||||||||||
Exercise of employee stockoptions, including net taxwindfall of $304 | 22,249 | - | 810 | - | - | - | ||||||||||||||||||
Restricted stock issued | 56,983 | 1 | - | 17,122 | (470 | ) | - | |||||||||||||||||
Foreign currency translationadjustments | - | - | - | - | - | (264 | ) | |||||||||||||||||
Balance at March 31, 2014 | 14,556,544 | $ | 15 | $ | 195,581 | 973,564 | $ | (16,111 | ) | $ | (1,683 | ) |
Common Stock Additional Paid-In Treasury Stock Accumulated Other Comprehensive Shares Amount Capital Shares Amount Loss Balance at December 31, 2012 Stock-based compensation Exercise of employee stockoptions, including net tax windfall of $123 Restricted stock issued Foreign currency translationadjustments Balance at September 30, 2013On March 27, 2014, the Company entered into an Amendment and Termination of Rights Agreement (“Amendment”) with Computershare Trust Company, N.A. (“Rights Agent”), which amended the Amended and Restated Rights Agreement (“Rights Agreement”), dated as of December 9, 2011, by and between the Company and the Rights Agent. The Amendment accelerated the expiration date of the Rights Agreement from December 9, 2014 to March 27, 2014, such that, as of March 27, 2014, the preferred share purchase rights, each representing the right to purchase one one-hundredth of a share of Series A Junior Participating Preferred Stock of the Company expired and were no longer outstanding, and the Rights Agreement was terminated. Following the termination of the Rights Agreement, the Company filed a Certificate of Elimination with the Secretary of State of the State of Delaware eliminating the Preferred Shares. 13,785,947 $ 14 $ 180,778 928,478 $ (15,094 ) $ (893 ) 0 0 2,402 0 0 0 551,601 0 9,367 0 0 0 89,055 0 0 24,298 (454 ) 0 0 0 0 0 0 (262 ) 14,426,603 $ 14 $ 192,547 952,776 $ (15,548 ) $ (1,155 )
11.6. Earnings Per Share
The following table details the computation of basic and diluted earnings per share (in thousands except share and per share data):share:
Three months ended | ||||||||
March 31, | ||||||||
2014 | 2013 | |||||||
Numerator: | ||||||||
Net income, basic | $ | 6,287 | $ | 6,678 | ||||
Effect of interest related to the Senior Notes | 499 | 499 | ||||||
Net income available to common stockholders,diluted | $ | 6,786 | $ | 7,177 | ||||
Denominator: | ||||||||
Denominator for basic earnings per share --weighted-average shares | 13,801,456 | 13,148,717 | ||||||
Effect of dilutive securities: | ||||||||
Common stock options and restricted stock awards | 299,784 | 219,505 | ||||||
Performance-based restricted stock units | 17,172 | - | ||||||
Senior Notes | 1,139,145 | 1,139,145 | ||||||
Denominator for diluted earnings per share -- adjustedweighted-average shares assumed conversion | 15,257,557 | 14,507,367 | ||||||
Basic earnings per share | $ | 0.45 | $ | 0.51 | ||||
Diluted earnings per share | $ | 0.44 | $ | 0.49 |
Three months ended September 30, Nine months ended September 30, 2013 2012 2013 2012 Numerator: Net income available to common stockholders Denominator: Denominator for basic earnings per share --weighted-average shares Effect of dilutive securities: Common stock options and restricted stock awards Performance-based restricted stock units Denominator for diluted earnings per share -- adjustedweighted-average shares assumed conversion Basic earnings per share Diluted earnings per share $ 3,527 $ 1,158 $ 16,081 $ 5,617 13,674,467 13,263,826 13,411,204 13,277,191 340,665 78,788 279,032 111,164 34,197 0 20,888 0 14,049,329 13,342,614 13,711,124 13,388,355 $ 0.26 $ 0.09 $ 1.20 $ 0.42 $ 0.25 $ 0.09 $ 1.17 $ 0.42
The effect of issuing 1,139,145 shares of common stock on an assumed conversion basis related to the Notesconvertible senior subordinated notes (“Senior Notes”) was excluded in the computation of diluted earnings per share for the three and nine months ended September 30, 2013 as it would have been antidilutive. The effect of issuing 1,182,989 and 1,193,618 shares of common stock on an assumed conversion basis related to the Notes was not included in the computation of diluted earnings per share for the three and nine months ended September 30, 2012, respectively,March 31, 2014 and 2013 as it wouldthey have been antidilutive.a dilutive effect. For the three and nine months ended September 30,March 31, 2014 and 2013, and 2012, employee stock options to purchase 202,054, 497,075, 1,567,027198,261 and 1,577,081880,010 shares of common stock, respectively, were not included in the computation of diluted earnings per share as the exercise price of these options was greater than the average fair value of the common stock for the period and, therefore, the effect of these options would have been antidilutive.
12.7. Income Taxes
The Company’s effective tax rate from continuing operations for the three and nine months ended September 30,March 31, 2014 and 2013 was 36.7%40.1% and 39.8%41.2%, respectively. These rates wereFor both periods, the Company’s effective tax rate was higher than the United States federal statutory rate of 35.0%, due primarily to state income taxes andas well as non-deductible stock option expense, which were partially offset by the impact of disqualifying dispositions of incentive stock options.
The Company’s effective tax rate from continuing operations for the three and nine months ended September 30, 2012 was 61.6% and 45.2%, respectively. These rates were higher than the United States federal statutory rate of 35.0% due to state income taxes, non-deductible stock option expense and lower projected income before income taxes, which was primarily due to the $2.5 million intangible impairment charge recorded in the third quarter of 2012. Additionally, the tax rate for the nine months ended September 30, 2012 was favorably impacted by the final determination of the tax benefits related to certain liabilities assumed as a result of a 2011 acquisition.expense.
13.8. Commitments and Contingencies
The Company is involved in various claims and legal actions arising in the ordinary course of business, many of which are covered in whole or in part by insurance. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position, results of operations, or liquidity.
The Company has two deferred compensation plans for management and highly compensated employees. These deferred compensation plans are unfunded; therefore, benefits are paid from the general assets of the Company. The total of participant deferrals, which is reflected in “Other long-term liabilities” in the accompanying condensed consolidated balance sheets, was approximately $1.4 million$1,426 and $1.2 million$1,485 at September 30, 2013March 31, 2014 and December 31, 2012,2013, respectively.
14.9. Transactions with Related Parties
Upon the Company’s acquisition of Maple Services, LLC in August 2005, the Company’s former Chief Executive Officer, former Chief Financial Officer, and Chief Executive Officer of Human Services, became members of the board of directors of the non-profit organization (Maple Star Colorado, Inc.) formerly managed by Maple Services, LLC. In November 2012, the Company’s then Interim Chief Executive Officer and new Chief Financial Officer became members of Maple Star Colorado, Inc.’s board of directors. The Company provided management services to Maple Star Colorado, Inc. under a management agreement for consideration in the amount of approximately $225,000 and $188,000 for the nine months ended September 30, 2013 and 2012, respectively. Amounts due to the Company from Maple Star Colorado, Inc. for management services provided to it by the Company at September 30, 2013 and December 31, 2012 were approximately $208,000 and $231,000, respectively.
The Company operates a call center in Phoenix, Arizona. The building in which the call center is located is currently leased by the Company from VWP McDowell, LLC (“McDowell”) under a five year lease that expires in June 2014. The Company may terminate theA new lease has been executed with McDowell with a six-month prior written notice.commencement date of July 1, 2014 and termination date of June 30, 2024. Certain immediate family members of Herman M. Schwarz (the chief executive officer of the Company’s NET Services segmentnon-emergency transportation services and an executive officer of the Company) have a partial ownership interest in McDowell. In the aggregate, these immediate family members ownhave an approximateownership interest of approximately 13% interest in McDowell directly and indirectly through a trust. For the ninethree months ended September 30,March 31, 2014 and 2013, and 2012, the Company expensed approximately $312,000, each year,$105 and $102, respectively, in lease payments to McDowell. Future minimum lease payments due under the amendedcurrent and new lease agreements totaled approximately $534,000$4,886 at September 30,March 31, 2014.
10. Business Segments
The Company’s operations are organized and reviewed by management along its services lines. The Company operates in two segments, Human Services and NET Services. Human Services includes government sponsored human services consisting of home and community based counseling, foster care and not-for-profit management services. NET Services includes managing the delivery of non-emergency transportation services. All corporate costs have been allocated to the Human Services and NET Services operating segments.
The following table sets forth certain financial information attributable to the Company’s business segments for the three months ended March 31, 2014 and 2013.
For the three months ended March 31, | ||||||||
2014 | 2013 | |||||||
Revenues: | ||||||||
NET Services | $ | 198,077 | $ | 193,133 | ||||
Human Services | 91,326 | 88,354 | ||||||
Consolidated | $ | 289,403 | $ | 281,487 | ||||
Operating income: | ||||||||
NET Services | $ | 16,695 | $ | 11,287 | ||||
Human Services | (4,615 | ) | 1,818 | |||||
Consolidated | $ | 12,080 | $ | 13,105 |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes for the three and nine months ended September 30,March 31, 2014 and 2013, and 2012, as well as our consolidated financial statements and accompanying notes and management’s discussion and analysis of financial condition and results of operations included in our Form 10-K for the year ended December 31, 2012.2013. For purposes of “Management’s Discussion and Analysis of Financial Condition and Results of Operations”,Operations,” references to Q3Q1 2014 and Q1 2013 and Q3 2012 mean the three months ended September 30, 2013March 31, 2014 and the three months ended September 30, 2012, respectively. In addition, references to YTDMarch 31, 2013, and YTD 2012 mean the nine months ended September 30, 2013 and the nine months ended September 30, 2012, respectively.
Overview of our business
We are a direct provider ofprovide government sponsored human services, and a manager of not-for-profit organizations under contracts that deliver government sponsored social services. In addition, we brokerarrange for and manage Medicaid funded non-emergency transportation services. As a result of, and in response to, the large and growing population of eligible beneficiaries of government sponsored services, increasing pressure on governments to control costs and increasing acceptance of privatized human services and managed care solutions, we have grown both organically and by making strategic acquisitions.
We are focusedcontinue to focus on drivingimproving operating efficiencies, organic and acquisitive growth, improving operating efficiencies, and developing performance management systems that willdesigned to enhance and leverage our people and processes.core competencies. Our core competencies include:
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include our enduring customer relationships, geographic reach, breadth of services and experience, management of the health related needs of defined covered lives populations, management of provider networks, contract bidding infrastructure, managed care contracting experience and technology platform development. By enhancing and leveraging these core competencies, we believe we can benefit from emerging trends in healthcare such as healthcare reform coordinated and integrated healthcare, which includes providing services to individuals who are eligible for both Medicaid and continuedMedicare benefits. Further, by managing more populations eligible to receive our services, and outsourcing transportation management, we believe we can reduce the cost of transportation management.care.
WeWhile we believe we are well positioned to benefit from healthcare reform legislation by offeringand to offer our services to a growing population of individuals eligible to receive our services. However,services, there can be no assurances that programs under which we provide our services will receive continued or increased funding. Additionally, it is not clear when the healthcare reform legislation will be fully implemented or when, and if, we will see any positive impact.
While weWe also believe we are positioned to potentially benefit from recent trends that favor our in-home and community-based provision of human services,services; however, budgetary pressures still exist that could reduce funding for the services we provide. Medicaid budgets are fluid and dramatic changes in the financing or structure of Medicaid could have a negative impact on our business. We believe our business model allows us to make adjustments to help mitigate state budget pressures that are impacted by federal spending.
As of September 30, 2013,March 31, 2014, we were providing human services directly to approximately 55,70057,400 unique clients, and had approximately 16.017.6 million individuals eligible to receive services under our non-emergency transportation services contracts. We provided services to these clients from approximately 390385 locations in 4344 states, and the District of Columbia, and 3 provinces in Canada as of March 31, 2014.
Recent Developments
On March 31, 2014, the Company entered into a Share Sale Agreement (the “Sale Agreement”) to purchase all of the outstanding equity of Ingeus Limited (“Ingeus”), and an Australian Share Sale Agreement Side Deed (the “Side Deed”) pursuant to which, effective as of the closing, the Company will guarantee the obligations of Ingeus Europe Limited in its purchase of the share capital of Ingeus UK Limited from Deloitte LLP. Ingeus, based in Australia, is a distributed work force development company and market leader in outsourced employability programs, operating in the United States,social improvement, employment and British Columbia and Alberta, Canada.
welfare services markets.
Pursuant to the Sale Agreement and the Side Deed, the Company will pay a purchase price comprised of (i) a cash payment of GBP £35.0 million at closing, (ii) the issuance at closing of restricted shares of Company common stock and payment of cash with a combined value of GBP £14.3 million , subject to a vesting schedule of 25% per year over a four year period and (iii) contingent consideration of up to GBP £75 million, payable over a five year period, based on the achievement of certain levels of Ingeus’ earnings before interest, taxes, depreciation and amortization and other defined criteria.
The Sale Agreement contains customary representations and warranties of the parties and customary covenants regarding the conduct of business by Ingeus prior to the closing and other typical matters. Following the closing, the Company will have certain rights to indemnification for breaches of representations and warranties and other matters, subject to defined caps and time and other limitations. The acquisition is expected to close in the second quarter of 2014, subject to customary regulatory approvals and closing conditions, including the performance by the parties of their obligations under the Sale Agreement and the material accuracy of each party’s representations.
Critical accounting estimates and policies
As of September 30, 2013,March 31, 2014, there has been no change in our accounting policies or the underlying assumptions or methodologies used to fairly present our financial position, results of operations and cash flows for the periods covered by this report.
For further discussion of our critical accounting policies see management’s discussion and analysis of financial condition and results of operations contained in our Form 10-K for the year ended December 31, 2012.2013.
Results of operations
Segment reporting. Our financial operating results are organized and reviewed by our chief operating decision maker as two reportable segments−segments, Human Services (formerly our Social Services segment) and NETNon-emergency Transportation (“NET”) Services. We operate these reportable segments as separate divisions and differentiate the segments based on the nature of the services they offer as more fully described in our Form 10-K for the year ended December 31, 2012. During Q3 2013, the Company changed the name of its Social Services segment to Human Services. The name change was made as part of a rebranding effort to reflect the future vision of the Human Services business, and to fully better describe the broad spectrum of services it provides.2013.
Consolidated Results. The following table sets forth the percentage of consolidated total revenues represented by items in our unaudited condensed consolidated statements of income for the periods presented:
Three months ended | ||||||||||||||||||||||||
Three months ended September 30, | Nine months ended September 30, | March 31, | ||||||||||||||||||||||
2013 | 2012 | 2013 | 2012 | 2014 | 2013 | |||||||||||||||||||
Revenues: | ||||||||||||||||||||||||
Non-emergency transportation services | 68.5 | % | 68.6 | % | ||||||||||||||||||||
Human services | 30.6 | % | 30.0 | % | 31.1 | % | 32.9 | % | 31.5 | 31.4 | ||||||||||||||
Non-emergency transportation services | 69.4 | 70.0 | 68.9 | 67.1 | ||||||||||||||||||||
Total revenues | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | 100.0 | ||||||||||||||||||
Operating expenses: | ||||||||||||||||||||||||
Cost of non-emergency transportation services | 60.5 | 62.8 | ||||||||||||||||||||||
Client service expense | 27.8 | 26.2 | 27.0 | 28.1 | 29.3 | 26.8 | ||||||||||||||||||
Cost of non-emergency transportation services | 64.0 | 65.4 | 63.5 | 63.6 | ||||||||||||||||||||
General and administrative expense | 4.0 | 4.3 | 4.3 | 4.7 | 4.7 | 4.4 | ||||||||||||||||||
Asset impairment charge | - | 0.9 | 0.1 | 0.3 | ||||||||||||||||||||
Depreciation and amortization | 1.3 | 1.4 | 1.3 | 1.4 | 1.3 | 1.3 | ||||||||||||||||||
Total operating expenses | 97.1 | 98.2 | 96.2 | 98.1 | 95.8 | 95.3 | ||||||||||||||||||
Operating income | 2.9 | 1.8 | 3.8 | 1.9 | 4.2 | 4.7 | ||||||||||||||||||
Non-operating expense: | ||||||||||||||||||||||||
Interest expense (income), net | 0.7 | 0.7 | 0.6 | 0.7 | ||||||||||||||||||||
Loss on extinguishment of debt | 0.2 | - | 0.1 | - | ||||||||||||||||||||
Interest expense, net | 0.6 | 0.6 | ||||||||||||||||||||||
Income before income taxes | 2.0 | 1.1 | 3.1 | 1.2 | 3.6 | 4.1 | ||||||||||||||||||
Provision for income taxes | 0.7 | 0.7 | 1.2 | 0.5 | 1.4 | 1.7 | ||||||||||||||||||
Net income | 1.3 | % | 0.4 | % | 1.9 | % | 0.7 | % | 2.2 | % | 2.4 | % |
Overview of trends of our results of operations for YTD 2013Q1 2014
Our Human Services revenues for YTD 2013 as compared to YTD 2012 were unfavorably impacted primarily by the termination of, and changes to, certain management service agreements and waivers granted under the No Child Left Behind Act, or NCLB. In addition, revenue from our Canadian operations declined for YTD 2013 as compared to YTD 2012 due to the impact of a reorganization of the service delivery system in British Columbia and increased competition in this market, which began in early 2012. Partially offsetting decreases in these revenues for YTD 2013 as compared to YTD 2012 was the implementation of new programs in certain of our markets. Client service expenses also decreased from YTD 2012 to YTD 2013 by 0.7% or $1.5 million due to personnel and client expenses which were eliminated as a result of contract terminations and changes.
Our NET Services revenues for YTD 2013Q1 2014 as compared to YTD 2012Q1 2013 were favorably impacted by thenew contracts and expansion of business in our Georgia, Texas, New York and South Carolina markets, rate adjustments and continued expansion of our California ambulance commercial and managed care lines of business. The additional revenues from new business were partially offset by the transition of the Connecticut contract from a full risk to an administrative services only contract effective February 1, 2013 and the termination of our Wisconsin Medicaid contract effective July 31, 2013.certain markets. The results of operations for YTD 2013Q1 2014 as compared to YTD 2012Q1 2013 included an increase in revenue of 6.0%2.6% due to new business, while the cost of transportation increaseddecreased by 3.0%0.8% during this period, contributing to improved margins for Q1 2014.
Our Human Services revenues for Q1 2014 as compared to Q1 2013 increased 3.4% and were favorably impacted by contracts that began in 2013 and were fully implemented by the quarter. While we believe that changesend of the first quarter of 2014. However, client service expense increased in utilizationQ1 2014 from Q1 2013 by 12.2%. This increase included severance-related expenses for an executive officer, higher than expected foster care expenses and increased payroll and related costs due to an increase in the number of transportation services will continue to be a factor which may impact the results of our operations for the remainder of 2013, we expect continued positive revenue impact from new contracts implemented in 2012 and from negotiated rate adjustments in select programs.employees.
We believe the industry trend away from the more expensive out-of-home service providersfacility-based care services in favor of clinically appropriate home and community basedcommunity-based delivery systems likesuch as ours will continue. In addition, weWe believe that our effective, low cost home and community based service delivery system is becoming more attractive to certain payers that have historically only contracted with not-for-profit socialhuman services organizations. We also believe that the movement toward continued outsourcing of healthcare related non-emergency transportation management by governmental agencies and managed care organizations is a positive trend for the Company. Further, we believe we are well positioned to benefit from emerging trends in healthcare, particularly the development of integrated models of healthcare delivery and financing, and increased focus on logistics management as an important factor in improving patient access to preventative and health management services.
Q3 2013 compared to Q3 2012
Revenues
Human services.Human services revenues are comprised of the following:
(in thousands) Three months ended September 30, Percent 2013 2012 change Home and community based services Foster care services Management fees Total human services revenues $ 74,640 $ 72,259 3.3 % 9,282 8,394 10.6 % 780 3,297 -76.3 % $ 84,702 $ 83,950 0.9 %
Home and community based services. Our new workforce development program in Wisconsin, as well as an increase in school based revenues due to schools starting earlier in 2013 as compared to 2012, resulted in increased revenues for Q3 2013 as compared to Q3 2012. These increases were partially offset by the impact of certain other contract losses and changes in program requirements in Florida.
Foster care services.Our foster care services revenues increased during Q3Q1 2014 compared to Q1 2013 from Q3 2012 primarily as a result of expanding services into rural areas in Tennessee, which began in the second half of 2012.
Management fees.RevenuesFees for management services provided to certain not-for-profit organizations under management services agreements decreased due to the termination of, and changes to, certain management service agreements during 2013.
Non-emergency transportation services. NET Services revenues were as follows (in thousands):
Three Months Ended March 31, | Dollar | Percent | |||||||||||||
2014 | 2013 | change | change | ||||||||||||
$ | 198,077 | $ | 193,133 | $ | 4,944 | 2.6 | % |
(in thousands) Three months ended September 30, Percent 2013 2012 change Non-emergency transportation services $ 192,011 $ 196,335 -2.2 %
The decreaseincrease in NET Services revenues in Q1 2014 was primarily due to:driven by:
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● | an increase in membership in New Jersey; | |
● | expansion of our current Michigan Medicaid contract along with the | |
● | implementation of various new managed care contracts in |
The decreases above were partially offset by:
● | expansion of our managed care business in Louisiana, Massachusetts, New Mexico, New York and Hawaii; | |
● | continued expansion of our California ambulance commercial and managed care lines of business; and |
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This revenue growth was partially offset by a decrease in revenue resulting from the elimination and transition of the Connecticut “at-risk” contract to a new “administrative services only” contract implemented in February 2013, as well as the elimination of a City of Hartford contract and both the State and Southeast Region Medicaid contracts in Wisconsin in July 2013.
A significant portion of NET Services revenues wereService revenue is generated under capitated contracts where we assumedassume the responsibility of meeting the covered transportation needsrequirements of beneficiaries residing in a specific geographic region for fixed payment amounts per beneficiary. Due to the fixed revenue stream and variable expense structure of our NET Services operating segment, expenses related to this segment vary with seasonal fluctuations. We expect our operating results will continue tocontinuously fluctuate on a quarterly basis.
Human services.Human services revenues are comprised of the following (in thousands):
Three Months Ended March 31, | Dollar | Percent | ||||||||||||||
2014 | 2013 | change | change | |||||||||||||
Home and community based services | $ | 75,910 | $ | 76,960 | $ | (1,050 | ) | -1.4 | % | |||||||
Foster care services | 14,795 | 8,444 | 6,351 | 75.2 | % | |||||||||||
Management fees | 621 | 2,950 | (2,329 | ) | -78.9 | % | ||||||||||
Total human services revenues | $ | 91,326 | $ | 88,354 | $ | 2,972 | 3.4 | % |
Operating expensesHome and community based services. Home and community based services revenue decreased in Q1 2014 from Q1 2013 primarily due to the continued impact of waivers granted under the No Child Left Behind Act, inclement weather during the first quarter of 2014 leading to school cancellations, changes in program requirements in Florida, and continued movement out of group home programs, a trend that began in 2013. The decrease in revenue was partially offset by revenues derived from our workforce development program in Wisconsin that began during 2013 and was fully implemented by Q1 2014, as well as the impact of rate increases in certain programs during the latter half of 2013 and increased costs under certain cost reimbursement contracts.
Human ServicesFoster care services.
Client service expense.Client service expense includedOur foster care services revenues increased in Q1 2014 from Q1 2013 primarily as a result of our foster care contract in Texas that began in 2013, as well as the following for Q3 2013 and Q3 2012:continued expansion of services into rural areas in Tennessee.
(in thousands) Three months ended September 30, Percent 2013 2012 change Payroll and related costs Purchased services Other operating expenses Stock compensation Total client service expense $ 56,423 $ 55,031 2.5 % 6,579 5,951 10.6 % 13,761 12,260 12.2 % 118 220 -46.4 % $ 76,881 $ 73,462 4.7 %
PayrollManagement fees.The exit of, and related costs. Our payroll and related costs increased during Q3 2013 from Q3 2012 primarily duechanges to, the increase of approximately $1.2 million in payroll and related costs for a workforce development contract in Wisconsin that began in 2013. The overall increase in payroll and related costscertain management service agreements resulted in an increasedecreased management fees in the ratioQ1 2014 as compared to Q1 2013. We expect management fees to continue to decrease in 2014 and become a nominal part of payroll and related costs to revenues in our Human Services segment to 66.6% for Q3 2013 from 65.6% for Q3 2012.business.
Purchased services.Operating expenses We subcontract with a network of providers for a portion of the workforce development services we provide throughout British Columbia, Canada. In addition, we incur a variety of other support service expenses in the normal course of business including foster parent payments, pharmacy payments and out-of-home placements. In Q3 2013 we experienced an increase in costs for foster parent payments of approximately $210,000 and pharmacy payments of approximately $226,000 as compared to Q3 2012. Purchased services as a percentage of our Human Services segment revenues increased to 7.8% for Q3 2013 from 7.1% for Q3 2012.
Other operating expenses. Other operating expenses increased by approximately $234,000 for Q3 2013 as compared to Q3 2012 due to an increase in incurred but not reported automobile, general liability and workers’ compensation claims. Additionally, other operating expenses increased by approximately $626,000 for client related costs including client tuition, mileage and transportation, primarily related to new program expenses. Other increases in Q3 2013 compared to Q3 2012 included professional fees and temporary labor expenses. Other operating expenses, as a percentage of revenues of our Human Services segment, increased to 16.2% for Q3 2013 from 14.6% for Q3 2012.
Stock-based compensation. Stock-based compensation expense was primarily comprised ofthe amortization of the fair value of stock options and restricted stock awarded to key employees under our 2006 Long-Term Incentive Plan, or 2006 Plan, which was approximately $100,000 and $200,000 for Q3 2013 and Q3 2012, respectively. In addition, stock-based compensation expense included costs related to performance restricted stock units granted to an executive officer.
NET Services
Cost of non-emergency transportation services.Cost of non-emergency transportation services expenseNET Services expenses included the following for Q3Q1 2014 and Q1 2013 and Q3 2012:(in thousands):
(in thousands) Three months ended September 30, Percent 2013 2012 Change Payroll and related costs Purchased services Other operating expenses Stock compensation Total cost of non-emergencytransportation services $ 23,383 $ 20,241 15.5 % 147,010 155,675 -5.6 % 6,435 6,967 -7.6 % 221 365 -39.5 % $ 177,049 $ 183,248 -3.4 %
The Months Ended March 31, | Dollar | Percent | ||||||||||||||
2014 | 2013 | change | change | |||||||||||||
Payroll and related costs | $ | 24,624 | $ | 22,896 | $ | 1,728 | 7.5 | % | ||||||||
Purchased services | 143,945 | 146,870 | (2,925 | ) | -2.0 | % | ||||||||||
Other operating expenses | 6,448 | 6,585 | (137 | ) | -2.1 | % | ||||||||||
Stock-based compensation | 213 | 333 | (120 | ) | -36.0 | % | ||||||||||
Total cost of non-emergencytransportation services | $ | 175,230 | $ | 176,684 | $ | (1,454 | ) | -0.8 | % |
Payroll and related costs. The increase in payroll and related costs of our NET Services segment for Q3 2013Q1 2014 as compared to Q3 2012Q1 2013 was due to the hiring of additional staff hired for new managed care contracts nationwide, the last phase ofin Maine and Utah, expansion in our New York City Medicaid contractefforts across several other markets, and additional staffing needed for the expansion of the California ambulance commercial and managed care lines of business. Payroll and related costs, as a percentage of NET Services revenue, increased to 12.2%12.4% for Q3Q1 2014 from 11.9% for Q1 2013, from 10.3% for Q3 2012 as we have added additional call center staff to ensure our compliance with the more demanding service authorization process and intake response time requirements of some of our new contracts, as well as transitioning the increase inConnecticut contract from full risk contracts to administrative services only contracts, whichcontracts. All of these activities resulted in higher payroll and related costs as a percentage of theirconsolidated revenue.
Purchased services. We subcontract with third party transportation providers to provide non-emergency transportation services to our clients. DuringThe termination of one City of Hartford contract, several managed care contracts, and both of our Wisconsin contracts, along with the past year we have transitioned our Connecticut “at risk” contracttransition to an “administrative services”administrative services only contract thus eliminating our responsibility for payingin Connecticut and reduced transportation providers for services. This resulted inutilization due to inclement weather, has led to a decrease in purchased transportationservices. However, this decrease was partially offset by additional purchased service costs for Q3 2013our expanded business and new contracts covering Hawaii, Illinois, Kansas, Louisiana, Maine, Massachusetts, Michigan, New Mexico, New York, and Utah, as well as further California expansion in both the commercial and managed care markets for Q1 2014 as compared to Q3 2012.Q1 2013. As a percentage of NET Services revenue, purchased services decreased to approximately 76.6%72.7% for Q3 2013Q1 2014, from 79.3%76.0% for Q3 2012.Q1 2013.
Other operating expenses. Other operating expenses decreased for Q3 2013Q1 2014 as compared to Q3 2012Q1 2013 due primarily to decreased telecommunication expensesefficiencies gained as we optimized most of our call center and management infrastructure, as well as lower loss reserves for our captive insurance company, which were partially offset by increased software maintenance anda reduction in new contract consulting fees.implementation costs. Other operating expenses as a percentage of NET Services revenues decreased towere 3.3% for Q1 2014 and 3.4% for Q3 2013 from 3.6% for Q3 2012.Q1 2013.
Stock-based compensation. Stock-based compensation expense was approximately $0.2 million and $0.3 million for Q1 2014 and Q1 2013, respectively. This item was primarily comprised of the amortization of the fair value of stock options and restricted stock awarded to employees of our NET Services segment under our 2006 Plan, which was approximately $200,000 and $349,000 for Q3 2013 and Q3 2012, respectively. In addition, stock-based compensation expense includedas well as costs related to performance restricted stock units grantedunits.
Human Services
Client service expense. Client service expense included the following for Q1 2014 and Q1 2013 (in thousands):
Three Months Ended March 31, | Dollar | Percent | ||||||||||||||
2014 | 2013 | change | change | |||||||||||||
Payroll and related costs | $ | 61,799 | $ | 58,592 | $ | 3,207 | 5.5 | % | ||||||||
Purchased services | 11,811 | 5,824 | 5,987 | 102.8 | % | |||||||||||
Other operating expenses | 11,178 | 10,895 | 283 | 2.6 | % | |||||||||||
Stock-based compensation | (40 | ) | 206 | (246 | ) | -119.4 | % | |||||||||
Total client service expense | $ | 84,748 | $ | 75,517 | $ | 9,231 | 12.2 | % |
Payroll and related costs. Our payroll and related costs increased in Q1 2014 from Q1 2013 primarily due to severance costs related to the termination of an executive officer, increased medical claims expense, increased headcount in certain markets, including North Carolina, Texas and Delaware and the inability to adjust service staffing levels in markets that were impacted by weather related reductions in service volume in Q1 2014. Payroll and related costs as a percentage of revenue of our Human Services segment were 67.7% for Q1 2014 and 66.3% for Q1 2013.
Purchased services. We incur a variety of other support service expenses in the normal course of our domestic business, including foster parent payments, pharmacy payments and out-of-home placements. In addition, we subcontract with a network of providers for a portion of the workforce development services we provide throughout British Columbia, Canada. In Q1 2014, we experienced an increase in foster parent payments of approximately $6.2 million. This increase was primarily related to our contract in Texas that began in 2013. Purchased services, as a percentage of our Human Services segment revenues increased to 12.9% for Q1 2014, up from 6.6% for Q1 2013 due to the impact of foster parent payments.
Other operating expenses. Other operating expenses, as a percentage of revenue of our Human Services segment, remained relatively constant at 12.2% for Q1 2014 and 12.3% for Q1 2013.
Stock-based compensation. Stock-based compensationwas a benefit of approximately $40 thousand and an expense of approximately $0.2 million for Q1 2014 and Q1 2013, respectively. The benefit in Q1 2014 was primarily a result of the forfeiture of stock related awards for a terminated executive officer. This item also includes the amortization of the fair value of stock options and restricted stock awarded to key employee.employees under our 2006 Plan, as well as costs related to performance restricted stock units.
General and administrative expense.General and administrative expenses were as follows (in thousands):
(in thousands) Three months ended September 30, Percent 2013 2012 change $ 11,082 $ 12,069 -8.2 %
Three Months Ended March 31, | Dollar | Percent | |||||||||||||
2014 | 2013 | change | change | ||||||||||||
$ | 13,617 | $ | 12,452 | $ | 1,165 | 9.4 | % |
The decreaseincrease in administrative expenses for Q3 2013Q1 2014 as compared to Q3 2012Q1 2013 was primarily a result of approximately $1.8 million in costs incurred during Q1 2014 related to the acquisition of Ingeus Ltd., as well as an increase in facilities costs of approximately $0.5 million related to the opening of new operating locations. We expect to incur additional costs related to acquisitions in the remainder of fiscal year 2014. These increases were partially offset by a decrease in payroll and related costs of approximately $1.5$1.4 million, which was mainlyprimarily attributable to changes in management service agreements, partially offset by an increase of approximately $554,000 in facility costs.agreements. General and administrative expense, as a percentage of revenue, decreasedincreased to 4.0% for Q3 20134.7% in Q1 2014 from 4.3% for Q3 2012.4.4% in Q1 2013.
Asset impairment charge.
During Q3 2012, our foreign wholly-owned subsidiary WCG International Ltd., or WCG, experienced a decline in its business due to the impact of a reorganization of the service delivery system in British Columbia. As part of this reorganization, all of the contracts for services in this market expired and new contracts were put up for bid. Due to an increased level of competition in British Columbia and a decrease in the number of services funded, WCG was unable to regain the level of business it enjoyed prior to the reorganization. Based on these factors, we initiated an analysis of the fair value of goodwill and other intangible assets and determined that customer relationships which comprise other intangible assets were impaired. Based on this determination, we recorded a non-cash charge of approximately $2.5 million during Q3 2012 to reduce the carrying value of customer relationship intangible assets based on their estimated fair values.
Depreciation and amortization. Depreciation and amortization were as follows (in thousands):
(in thousands) Three months ended September 30, Percent 2013 2012 change $ 3,725 $ 4,018 -7.3 %
Three Months Ended March 31, | Dollar | Percent | |||||||||||||
2014 | 2013 | change | change | ||||||||||||
$ | 3,728 | $ | 3,729 | $ | (1 | ) | 0.0 | % |
As a percentage of revenues, depreciation and amortization was approximately 1.3% for Q3 2013Q1 2014 and 1.4% for Q3 2012.Q1 2013.
Non-operating (income) expense
Interest expense.expense, net. Our current and long-term debt obligations have decreased from approximately $127.3 million at March 31, 2013 to approximately $123.5 million at September 30, 2013, from $140.5 million at September 30, 2012, which was a significant factor contributing to theMarch 31, 2014. The decrease in our interest expense for Q3 2013Q1 2014 as compared to Q3 2012.Q1 2013 primarily resulted from the decrease in outstanding debt, as well as a decrease in the interest rate under the revised terms of our amended credit facility completed in August 2013.
Loss on extinguishment of debt. Loss on extinguishment of debt of approximately $525,000 for Q3 2013 resulted from the write-off of deferred financing fees related to our credit facility that was repaid in full in August 2013 with proceeds from our amended and restated credit facility. We accounted for the unamortized deferred financing fees related to the previous credit facility under ASC 470-50 –Debt Modifications and Extinguishments. As current and previous credit facilities were loan syndications, and a number of lenders participated in both credit facilities, the Company evaluated the accounting for financing fees on a lender by lender basis and recorded a charge accordingly.
Interest income. Interest income for Q3 2013 and Q3 2012 was approximately $40,000 and $25,000, respectively, and resulted primarily from interest earned on interest bearing bank and money market accounts.
Provision for income taxes
Our effective tax rate for Q3Q1 2014 and Q1 2013 was 40.1% and Q3 2012 was 36.7% and 61.1%41.2%, respectively. Our effective tax rate was higher than the United States federal statutory rate of 35.0% for Q3Q1 2014 and Q1 2013 and Q3 2012 due primarily to state taxes andas well as non-deductible stock option expense. The Q3 2013 effective tax rate was favorably impacted by disqualifying dispositions of incentive stock options, whereas the Q3 2012 effective tax rate was unfavorably impacted by lower projected income before income taxes, which was primarily due to the $2.5 million intangible impairment charge recorded during the quarter.
EBITDA andAdjusted EBITDA
After adjusting for the items noted in the table below, Adjusted EBITDA was $11.7$18.1 million for Q3 2013Q1 2014 as compared to $11.5$16.8 million for Q3 2012.Q1 2013.
EBITDA and Adjusted EBITDA are non-GAAP measurements. We utilize these non-GAAP measurements as a means to measure overall operating performance and to better compare current operating results with other companies within our industry. Details of the excluded items and a reconciliation of the non-GAAP financial measures to the most comparable GAAP financial measure are presented in the table below.below (in thousands). The non-GAAP measures do not replace the presentation of our GAAP financial results. We have provided this supplemental non-GAAP information because we believe it provides meaningful comparisons of the results of our operations for the periods presented. The non-GAAP measures are not in accordance with, or an alternative for GAAP, and may be different from non-GAAPpro forma measures used by some other companies.
Three months ended | ||||||||
March 31, | ||||||||
2014 | 2013 | |||||||
Net income | $ | 6,287 | $ | 6,678 | ||||
Interest expense, net | 1,585 | 1,751 | ||||||
Provision for income taxes | 4,208 | 4,676 | ||||||
Depreciation and amortization | 3,728 | 3,729 | ||||||
EBITDA | 15,808 | 16,834 | ||||||
Acquisition related costs | 1,829 | - | ||||||
Payments related to the termination of anexecutive officer, net (a) | 511 | - | ||||||
Adjusted EBITDA | $ | 18,148 | $ | 16,834 |
(a) | Represents payments related to the termination of an executive officer, net of benefit of forfeiture of stock based compensation upon his departure. |
(in thousands) Three months ended September 30, 2013 2012 Net income Interest expense, net Provision for income taxes Depreciation and amortization EBITDA Asset impairment charge Loss on extinguishment of debt Strategic alternatives costs (a) Adjusted EBITDA $ 3,527 $ 1,158 1,876 1,965 2,048 1,859 3,725 4,018 11,176 9,000 - 2,506 525 - - 2 $ 11,701 $ 11,508
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YTD 2013 compared to YTD 2012
Revenues
Human services.Human services revenues are comprised of the following:
(in thousands) Nine months ended September 30, Percent 2013 2012 change Home and community based services Foster care services Management fees Total human services revenues $ 228,449 $ 235,007 -2.8 % 26,777 25,113 6.6 % 7,583 9,406 -19.4 % $ 262,809 $ 269,526 -2.5 %
Home and community based services.Contract terminations in Florida and Canada, as well as the impact of waivers granted under the NCLB, led to a decrease in home and community based services revenues for YTD 2013 as compared to YTD 2012. The decrease in revenue was partially offset by our new workforce development program in Wisconsin that began during YTD 2013.
Foster care services.Our foster care services revenues increased during YTD 2013 from YTD 2012 primarily as a result of expanding services into rural areas in Tennessee and increases in intakes in Illinois. This increase, however, was partially offset by a decrease in foster care services provided in Arizona, Oregon and Nevada due to reduced payer authorizations for these services.
Management fees.The termination of, and changes to, certain management service agreements resulted in decreased management fees during YTD 2013 as compared to YTD 2012.
Non-emergency transportation services.
(in thousands) Nine months ended September 30, Percent 2013 2012 change Non-emergency transportation services $ 583,028 $ 549,844 6.0 %
NET Services revenues were favorably impacted by the following:
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The factors noted above were partially offset by the elimination and transition of the Connecticut “at-risk” contract to a new “administrative services only” contract implemented in February 2013, which resulted in a decrease in revenue, as well as the elimination of both the State and Southeast Region Medicaid contracts in Wisconsin.
Operating expenses
Human Services
Client service expense.Client service expense included the following for YTD 2013 and YTD 2012:
(in thousands) Nine months ended September 30, Percent 2013 2012 change Payroll and related costs Purchased services Other operating expenses Stock compensation Total client service expense $ 170,124 $ 172,744 -1.5 % 18,689 20,261 -7.8 % 39,361 36,515 7.8 % 521 680 -23.4 % $ 228,695 $ 230,200 -0.7 %
Payroll and related costs. Our payroll and related costs decreased during YTD 2013 from YTD 2012 primarily due to net decreases in payroll in Florida and Canada, as well as in our nationwide tutoring business, in the aggregate amount of approximately $5.8 million, which was principally the result of contract terminations and the impact of waivers granted under the NCLB. This decrease was partially offset by an increase of approximately $3.6 million in payroll and related costs for a workforce development contract in Wisconsin that began in 2013. Payroll and related costs as a percentage of revenue of our Human Services segment were 64.7% for YTD 2013 and 64.1% for YTD 2012.
Purchased services. We subcontract with a network of providers for a portion of the workforce development services we provide throughout British Columbia, Canada. In addition, we incur a variety of other support service expenses in the normal course of business including foster parent payments, pharmacy payments and out-of-home placements. In YTD 2013 we experienced decreased costs resulting from contract terminations in Canada of approximately $1.6 million as compared to YTD 2012. Purchased services, as a percentage of our Human Services segment revenues decreased to 7.1% for YTD 2013 from 7.5% for YTD 2012 due to the impact of decreased workforce development costs in Canada relative to the level of revenue from this market.
Other operating expenses. Other operating expenses increased by approximately $897,000 for YTD 2013 as compared to YTD 2012 due to an increase in incurred but not reported automobile, general liability and workers’ compensation claims. Additionally, other operating expenses increased by approximately $933,000 for client related costs including client mileage and transportation, primarily related to new program expenses. Other operating expenses, as a percentage of revenue of our Human Services segment, increased to 15.0% for YTD 2013 from 13.6% for YTD 2012.
Stock-based compensation. Stock-based compensation expense was primarily comprised of the amortization of the fair value of stock options and restricted stock awarded to key employees under our 2006 Plan which was approximately $464,000 and $598,000 for YTD 2013 and YTD 2012, respectively. In addition, stock-based compensation expense included costs related to performance restricted stock units granted to an executive officer.
NET Services
Cost of non-emergency transportation services.Cost of non-emergency transportation services expense included the following for YTD 2013 and YTD 2012:
(in thousands) Nine months ended September 30, Percent 2013 2012 Change Payroll and related costs Purchased services Other operating expenses Stock compensation Total cost of non-emergencytransportation services $ 69,350 $ 57,614 20.4 % 447,197 444,139 0.7 % 19,254 17,991 7.0 % 863 1,122 -23.1 % $ 536,664 $ 520,866 3.0 %
Payroll and related costs. The increase in payroll and related costs of our NET Services segment for YTD 2013 as compared to YTD 2012 was due to additional staff hired for new contracts and contract expansions in Georgia, Texas, South Carolina and New York, along with additional staffing needed for expansion of the California ambulance commercial and managed care lines of business. Payroll and related costs, as a percentage of NET Services revenue, increased to 11.9% for YTD 2013 from 10.5% for YTD 2012 as we have added additional call center staff to ensure our compliance with the more demanding service authorization process and intake response time requirements of some of our new contracts, as well as transitioning the Connecticut contract and various New York managed care contracts from full risk contracts to administrative services only contracts, which resulted in higher payroll and related costs as a percentage of their revenue.
Purchased services. We subcontract with third party transportation providers to provide non-emergency transportation services to our clients. Since the beginning of 2012, we have expanded our current business in Georgia, Texas, South Carolina, California and Wisconsin (which was terminated on July 31, 2013). These additions resulted in an increase in purchased transportation costs for YTD 2013 as compared to YTD 2012. As a percentage of NET Services revenue, purchased services decreased to approximately 76.7% for YTD 2013 from 80.8% for YTD 2012. This decrease was partly due to the transition to and implementation of two administrative services only contracts whereby we are only responsible for the authorization process, not the payment to transportation providers.
Other operating expenses. Other operating expenses increased for YTD 2013 as compared to YTD 2012 due primarily to increased telecommunication expenses to support new contracts, bad debt expense associated with our expanded commercial California business and overall administrative expenses in various expanded markets. Other operating expenses as a percentage of NET Services revenues remained constant at 3.3% for YTD 2013 and YTD 2012.
Stock-based compensation. Stock-based compensation expense was primarily comprised of the amortization of the fair value of stock options and restricted stock awarded to employees of our NET Services segment under our 2006 Plan which was approximately $797,000 and $1.1 million for YTD 2013 and YTD 2012, respectively. In addition, stock-based compensation expense included costs related to performance restricted stock units granted to an executive officer and a key employee.
General and administrative expense.
(in thousands) Nine months ended September 30, Percent 2013 2012 change $ 36,265 $ 38,599 -6.0 %
The decrease in administrative expenses for YTD 2013 as compared to YTD 2012 was primarily a result of a decrease in payroll and related costs of approximately $1.8 million, which was mainly attributable to changes in management service agreements, a decrease in stock compensation expense of approximately $1.0 million and a decrease in other miscellaneous expenses. These items were partially offset by an increase in facilities costs of approximately $985,000 related to our growth and the opening of new operating locations. General and administrative expense, as a percentage of revenue, decreased to 4.3% for YTD 2013 from 4.7% for YTD 2012 primarily due to the decreases in general and administrative expenses discussed above as well as a total revenue increase of approximately 3.2% that did not significantly impact general and administrative expenses.
Asset impairment charge.
(in thousands) Nine months ended September 30, Percent 2013 2012 change $ 492 $ 2,506 -80.4 %
During the second quarter of 2013, the not-for-profit entities managed by Rio Grande Management Company, L.L.C., or Rio, our wholly-owned subsidiary, were notified of the termination of funding for some or all of their services. We expect that, due to this change in funding, the not-for-profit entities Rio serves will not be able to maintain the level of business they historically experienced, which is expected to result in the decrease or elimination of services provided by Rio. Based on these factors, in connection with preparing the financial statements included in this report, we initiated an analysis of the fair value of goodwill and determined that goodwill related to Rio was impaired. Based on this determination, as of June 30, 2013, we recorded a non-cash charge of approximately $492,000 to reduce the carrying value of the related goodwill to zero.
During YTD 2012, WCG experienced a decline in its business due to the impact of a reorganization of the service delivery system in British Columbia. As part of this reorganization, all of the contracts for services in this market expired and new contracts were put up for bid. Due to an increased level of competition in British Columbia and a decrease in the number of services funded, WCG was unable to regain the level of business it enjoyed prior to the reorganization. The impact of this system reorganization was not fully realized until the conclusion of the transition to the new system in Q3 2012 and contributed to a decrease in the financial results of operations of WCG for YTD 2012. Based on these factors, we initiated an analysis of the fair value of goodwill and other intangible assets and determined that customer relationships which comprise other intangible assets were impaired. Based on this determination, we recorded a non-cash charge of approximately $2.5 million to reduce the carrying value of customer relationship intangible assets based on their estimated fair values.
Depreciation and amortization.
(in thousands) Nine months ended September 30, Percent 2013 2012 change $ 11,188 $ 11,254 -0.6 %
As a percentage of revenues, depreciation and amortization was approximately 1.3% and 1.4% for YTD 2013 and YTD 2012, respectively.
Non-operating (income) expense
Interest expense. Our current and long-term debt obligations have decreased to approximately $123.5 million at September 30, 2013, from $140.5 million at September 30, 2012, which was a significant factor contributing to the decrease in our interest expense for YTD 2013 as compared to YTD 2012.
Loss on extinguishment of debt. Loss on extinguishment of debt of approximately $525,000 for YTD 2013 resulted from the write-off of deferred financing fees related to our credit facility that was repaid in full in August 2013 with proceeds of our amended and restated credit facility. We accounted for the unamortized deferred financing fees related to the previous credit facility under ASC 470-50 –Debt Modifications and Extinguishments. As current and previous credit facilities were loan syndications, and a number of lenders participated in both credit facilities, the Company evaluated the accounting for financing fees on a lender by lender basis and recorded a charge accordingly.
Interest income. Interest income for YTD 2013 and YTD 2012 was approximately $92,000 and $109,000, respectively, and resulted primarily from interest earned on interest bearing bank and money market accounts.
Provision for income taxes
Our effective tax rate for YTD 2013 and YTD 2012 was 39.8% and 45.2%, respectively. Our effective tax rate was higher than the United States federal statutory rate of 35.0% for YTD 2013 and YTD 2012 due primarily to state taxes as well as non-deductible stock option expense. The YTD 2013 effective tax rate was favorably impacted by disqualifying dispositions of incentive stock options and the YTD 2012 rate was also favorably impacted by the final determination of the tax benefits related to certain liabilities assumed as a result of a 2011 acquisition. The YTD 2012 effective tax rate was unfavorably impacted by lower projected income before income taxes, which was primarily due to the $2.5 million intangible impairment charge recorded in Q3 2012.
EBITDA andAdjusted EBITDA
After adjusting for the items noted in the table below, Adjusted EBITDA was $44.2 million for YTD 2013 as compared to $30.3 million for YTD 2012.
EBITDA and Adjusted EBITDA are non-GAAP measurements. We utilize these non-GAAP measurements as a means to measure overall operating performance and to better compare current operating results with other companies within our industry. Details of the excluded items and a reconciliation of the non-GAAP financial measures to the most comparable GAAP financial measure are presented in the table below. The non-GAAP measures do not replace the presentation of our GAAP financial results. We have provided this supplemental non-GAAP information because we believe it provides meaningful comparisons of the results of our operations for the periods presented. The non-GAAP measures are not in accordance with, or an alternative for, GAAP and may be different from non-GAAP measures used by some other companies.
(in thousands) Nine months ended September 30, 2013 2012 Net income Interest expense, net Provision for income taxes Depreciation and amortization EBITDA Asset impairment charge Loss on extinguishment of debt Strategic alternatives costs (a) Adjusted EBITDA $ 16,081 $ 5,617 5,315 5,697 10,612 4,631 11,188 11,254 43,196 27,199 492 2,506 525 - - 593 $ 44,213 $ 30,298
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Seasonality
Our quarterly operating results and operating cash flows normally fluctuate as a result of seasonal variations in our business. In our Human Services operating segment, lower client demand for our home and community based services during the holiday and summer seasons generally results in lower revenue during those periods; however,periods. However, our operating expenses related to the Human Services operating segment do not vary significantly with these changes. As a result, our Human Services operating segment typically experiences lower operating margins during the holiday and summer seasons. Our NET Services operating segment also experiences fluctuations in demand for our non-emergency transportation services during the summer, winter and holiday seasons. Due to higher demand in the summer months and lower demand in the winter and holiday seasons, coupled with a primarily fixed revenue stream based on a per member, per month basedpayment structure, our NET Services operating segment normally experiences lower operating margins in the summer season and higher operating margins in the winter and holiday seasons.
We expect quarterly fluctuations in operating results and operating cash flows to continue as a result of the seasonal demand for our home and community based services and non-emergency transportation services. As we enter new markets, we could be subject to additional seasonal variations along with any competitive response by other human services and transportation providers.
Liquidity and capital resources
Short-term liquidity requirements consist primarily of recurring operating expenses and debt service requirements. We expect to meet these requirements through available cash, generation of cash from our segments, and the amendedfrom our revolving and term loan credit facility entered into on August 2, 2013.facility.
Sources of cash for YTD 2013Q1 2014 were primarily from operations. Our balance of cash and cash equivalents was approximately $91.1$105.8 million at September 30, 2013March 31, 2014 and $55.9$99.0 million at December 31, 2012.2013. Approximately $4.7$3.7 million of cash was held by WCG at September 30, 2013 thatMarch 31, 2014, and is not available to fund domestic operations unless the funds are repatriated. We had restricted cash of approximately $18.0$14.3 million and $12.7$15.7 million at September 30, 2013March 31, 2014 and December 31, 2012,2013, respectively, related to contractual obligations and activities of our captive insurance subsidiaries and other subsidiaries. At September 30, 2013March 31, 2014 and December 31, 2012,2013, our total interest-bearing debt was approximately $123.5 millionmillion.
We may access capital markets to raise equity or debt financing for various business reasons, including required debt payments and $130.0 million, respectively.acquisitions. 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.
Cash flows
Operating activities.We generated net cash flows from operating activities of approximately $45.7$7.8 million for YTD 2013.Q1 2014. These cash flows included net income of approximately $16.1$6.3 million andplus net non-cash items including depreciation, amortization, amortization of deferred financing costs, loss on extinguishment of debt, provision for doubtful accounts, stock-based compensation, deferred income taxes asset impairment charge and other items of approximately $18.7$3.3 million. The balance of the cash provided by operating activities is primarily due to the net effect of changes in other working capital items, including the following significant items:
● | approximately |
● | approximately |
● | approximately $6.1 million related to the decrease in prepaid expenses and other assets primarily resulting from the decrease in prepaid insurance and prepaid income taxes since December 31, 2013. |
Investing activities.Net cash used in investing activities totaled approximately $11.5$1.2 million for YTD 2013.Q1 2014. Approximately $5.0 million of this amount related to an increase in restricted cash, which was primarily due to the annual insurance policy renewals and the opening of a trust account for our wholly-owned captive insurance subsidiary. Additionally, approximately $6.4$2.7 million was used to purchase property and equipment to support the growth of our operations.operations, which was offset by a reduction in restricted cash of approximately $1.5 million related to the payment of claims.
Financing activities.Net cash provided by financing activities totaled approximately $1.2 million for YTD 2013. We entered into a $60.0 million term loan and borrowed $16.0 million from our revolving credit facility, under the amended and restated credit facility entered into in August 2013. Additionally, we repaid approximately $82.5 million of long-term debt during this period. We also paid financing fees associated with the refinancing of our long-term debt, of which approximately $254,000 were expensed and approximately $1.8 million were deferred and are being amortized over the life of the credit facility. Cash provided by financing activities also included $9.2 million of cash received from employee stock option exercises.
Exchange rate change.The effect of exchange rate changes on our cash flow related to the activities of WCG for YTD 2013 was a decrease to cash of approximately $141,000.
Obligations and commitments
Convertible senior subordinated notes.On November 13, 2007, we issued the Senior Notes under the amended note purchase agreement dated November 9, 2007 to the purchasers named therein in connection with the acquisition of Charter LCI Corporation, including its subsidiaries, (collectively referred to as Logisticare) in December 2007. The proceeds of $70.0 million were used to partially fund the cash portion of the purchase price paid by us to acquire LogistiCare. The Senior Notes are general unsecured obligations subordinated in right of payment to any existing or future senior debt including our credit facility described below.
We pay interest at a rate of 6.5% per annum on the Senior Notes in cash semiannually in arrears on May 15 and November 15 of each year. The Senior Notes will mature on May 15, 2014.2014, and we intend to repay the Senior Notes through a combination of our cash on hand and borrowings under our revolving credit facility.
As of September 30, 2013,March 31, 2014, we have repurchased approximately $22.5 million principal amount of the Senior Notes with cash.
Credit facility. On March 11, 2011, we entered into a credit agreement, or Credit Agreement, with Bank of America, N.A., as administrative agent, swing line lender and letter of credit issuer, SunTrust Bank, as syndication agent, Bank of Arizona, Alliance Bank of Arizona and Royal Bank of Canada, as co-documentation agents, Merrill Lynch, Pierce, Fenner & Smith Incorporated and SunTrust Robinson Humphrey, Inc., as joint lead arrangers and joint book managers and other lenders party thereto. The Credit Agreement provided us with a senior secured credit facility, or the Senior Credit Facility, in aggregate principal amount of $140.0 million, comprised of a $100.0 million term loan facility and a $40.0 million revolving credit facility. On March 11, 2011, we borrowed the entire amount available under the term loan facility and used the proceeds thereof to refinance the prior credit facility.
Interest on the outstanding principal amount of the loans accrued, at our election, at a per annum rate equal to the London Interbank Offering Rate, or LIBOR, plus an applicable margin or the base rate plus an applicable margin. The applicable margin ranged from 2.25% to 3.00% in the case of LIBOR loans and 1.25% to 2.00% in the case of the base rate loans, in each case, based on our consolidated leverage ratio as defined in the Credit Agreement. Interest on the loans was payable at least once every three months in arrears. In addition, we were obligated to pay a quarterly commitment fee based on a percentage of the unused portion of each lender’s commitment under the revolving 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 ranged from 0.35% to 0.50% and 2.25% to 3.00%, respectively, in each case, based on our consolidated leverage ratio.
We were subject to affirmative and negative covenants, including financial covenants, relating to consolidated net leverage and consolidated net senior leverage as well as a consolidated fixed charge covenant.
The terms of the Notes and the Credit Agreement are more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading entitled “Liquidity and capital resources” included in our Annual Report on Form 10-K for the year ended December 31, 2012.
Amended and Restated Credit Agreement The Credit Agreement discussed above was replaced with an amended and restated credit agreement. On August 2, 2013, we entered into an Amended and Restated Credit Agreement with Bank of America, N.A., as administrative agent, swing line lender and letter of credit issuer, SunTrust Bank, as syndication agent, Merrill Lynch, Pierce, Fenner & Smith Incorporated and SunTrust Robinson Humphrey, Inc., as joint lead arrangers and joint book managers and other lenders party thereto. The Amended and Restated Credit Agreement provides us with a senior secured credit facility, or the New Senior Credit Facility, in aggregate principal amount of $225.0 million, comprised of a $60.0 million term loan facility and a $165.0 million revolving credit facility. There is an option to increase the amount of the term loan facility and/or the revolving credit facility by an aggregate amount of up to $75.0 million, as described below. The New Senior Credit Facility includes sublimits for swingline loans and letters of credit in amounts of up to $10.0 million and $25.0 million, respectively. On August 2, 2013, we borrowed the entire amount available under the term loan facility and $16.0 million under our revolving credit facility and used the proceeds thereof to refinance certain of our existing indebtedness. Prospectively, the proceeds of the New Senior Credit Facility may be used to (i) fund ongoing working capital requirements; (ii) make capital expenditures; (iii) repay the Notes; and (iv) other general corporate purposes.
Under the New Senior Credit Facility we have an option to request an increase in the amount of the revolving credit facility and/or the term loan facility from time to time (on substantially the same terms as apply to the existing facilities) in an aggregate amount of up to $75.0 million with either additional commitments from lenders under the Amended and Restated 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. We 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 New Senior Credit Facility.
The New Senior Credit Facility matures on August 2, 2018. We may prepay the New Senior Credit Facility 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 LIBOR loans. The unutilized portion of the commitments under the New Senior Credit Facility may be irrevocably reduced or terminated by us at any time without penalty.
Interest on the outstanding principal amount of the loans accrues, at our election, at a per annum rate equal to the London Interbank Offering Rate, or LIBOR, plus an applicable margin or the base rate plus an applicable margin. The applicable margin ranges from 1.75% to 2.50% in the case of LIBOR loans and 0.75% to 1.50% in the case of the base rate loans, in each case, based on our consolidated leverage ratio as defined in the Amended and Restated Credit Agreement. Interest on the loans is payable quarterly in arrears. The interest rate applied to our term loan at September 30, 2013March 31, 2014 was 2.43%2.41%. In addition, we are obligated to pay a quarterly commitment fee based on a percentage of the unused portion of each lender’s commitment under the revolving 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 ranges from 0.25% to 0.50% and 1.75% to 2.50%, respectively, in each case, based on our consolidated leverage ratio.
The term loan facility under the New Senior Credit Facility isWe are subject to quarterly amortization payments, commencing on December 31, 2014, so that the following percentages of the term loan outstanding on the closing date plus the principal amount of any term loans funded pursuant to the increase option are repaid as follows: 5.0% between December 31, 2014 and September 30, 2015, 7.5% between December 31, 2015 and September 30, 2016, 10.0% between December 31, 2016 and September 30, 2017, 11.25% between December 31, 2017 and June 30, 2018 and the remaining balance at maturity. The New Senior Credit 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.
The Amended and Restated Credit Agreement contains customary affirmative and negative covenants, and events of default. The negative covenants include restrictions on our ability to, among other things, incur additional indebtedness, create liens, make investments, give guarantees, pay dividends, sell assets and merge and consolidate. We are subject toincluding financial covenants, includingrelating to consolidated net leverage and consolidated net senior leverage as well as a consolidated fixed charge covenants.covenant. We were in compliance with all covenants as of September 30, 2013.March 31, 2014.
$16.0We had $16.0 million of borrowings were outstanding under the revolving credit facility as of September 30, 2013.March 31, 2014. $25.0 million of the revolving credit facility is available to collateralize certain letters of credit. As of September 30, 2013,March 31, 2014, there were six letters of credit in the amount of approximately $6.7 million collateralized under the revolving credit facility. At September 30, 2013,March 31, 2014, our available credit under the revolving credit facility was $142.3 million.
Our obligationsThe terms of the Notes and the Credit Agreement are more fully described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the New Senior Credit Facility are guaranteed by all ofheading entitled “Liquidity and capital resources” included in our present and future domestic subsidiaries, excluding certain domestic subsidiaries, which include our insurance captives and not-for-profit subsidiaries. Our obligations under, and each guarantor’s obligations under its guaranty ofAnnual Report on Form 10-K for the New Senior Credit Facility are secured by a first priority lien on substantially all of our respective assets, including a pledge of 100% of the issued and outstanding stock of our domestic subsidiaries and 65% of the issued and outstanding stock of our first tier foreign subsidiaries.
year ended December 31, 2013.
We incurred fees of approximately $2.1 million to refinance our long-term debt. We have accounted for fees related to the refinancing of our long-term debt, as well as unamortized deferred financing fees related to the Senior Credit Facility, under ASC 470-50 –Debt Modifications and Extinguishments. As both credit facilities were loan syndications, and a number of lenders participated in both credit facilities, we evaluated the accounting for financing fees on a lender by lender basis. Of the total amount of deferred financing fees related to the Senior Credit Facility, approximately $849,000 will continue to be deferred and amortized and approximately $525,000 was expensed in the quarter ending September 30, 2013. Of the $2.1 million of fees incurred to refinance the long-term debt, approximately $1.8 million will be deferred and amortized and approximately $254,000 was expensed in the quarter ending September 30, 2013.
Contingent obligations. Under The Providence Service Corporation Deferred Compensation Plan, as amended, or Deferred Compensation Plan, eligible employees and independent contractors or a participating employer (as defined in the Deferred Compensation Plan) may defer all or a portion of their base salary, service bonus, performance-based compensation earned in a period of 12 months or more, commissions and, in the case of independent contractors, compensation reportable on Form 1099. The Deferred Compensation Plan is unfunded and benefits are paid from our general assets. As of September 30, 2013, there were six participants in the Deferred Compensation Plan. We also maintain a 409(A) Deferred Compensation Rabbi Trust Plan for highly compensated employees of our NET Services segment. Benefits are paid from our general assets under this plan. As of September 30, 2013, 25 highly compensated employees participated in this plan.
Reinsurance and Self-Funded Insurance Programs
Reinsurance
We reinsure 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. At September 30, 2013,March 31, 2014, the cumulative reserve for expected losses since inception of these automobile, general and professional liability and workers’ compensation costs reinsurance programs was approximately $184,000, $2.3$0.4 million, $2.5 million and $8.0 million, respectively. In addition, based on an independent actuarial report, our expected losses related to workers’ compensation and general and professional liability in excess of our liability under our associated reinsurance programs at September 30, 2013March 31, 2014 was approximately $3.9$3.5 million. Further, SPCIC had restricted cash of approximately $16.1$12.6 million and $10.7$13.9 million at September 30, 2013March 31, 2014 and December 31, 2012,2013, respectively, which was restricted to secure the reinsured claims losses of SPCIC under the automobile, general and professional liability and workers’ compensation reinsurance programs.
Historically, we also provided reinsurance for policies written by a third party insurer for general liability, automobile liability, and automobile physical damage coverage to certain members of the network of subcontracted transportation providers and independent third parties under our NET Services segment through Provado.Provado Insurance Services, Inc. (“Provado”). While Provado did not renew its insurance agreement in February 2011 and no longer assumes liabilities for new policies, it will continue to administer existing policies for the foreseeable future and resolve remaining and future claims related to those policies. The cumulative reserve for expected losses of this reinsurance program at September 30, 2013March 31, 2014 was approximately $2.6$1.6 million.
Health Insurance
We offer our employees an option to participate in a self-funded health insurance program. The liability for the self-funded health plan of approximately $1.8 million and $2.1$1.9 million as of September 30, 2013March 31, 2014 and December 31, 2012,2013, respectively, was recorded in “Reinsurance liability reserve” in our condensed consolidated balance sheets.
Providence Liability Insurance Coverages
The decision to reinsure our risks and provide a self-funded health insurance program to our employees was made based on current conditions in the insurance marketplace that have led to increasingly higher levels of self-insurance retentions, increasing number of coverage limitations, and fluctuating insurance premium rates. Certain changes have been made to our insurance coverage since December 31, 2012, which we believe balance our costs and risks in an appropriate manner.
New Accounting Pronouncements
In February 2013, the FASB issued ASU 2013-02-Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income (“ASU 2013-02”). ASU 2013-02 is intended to improve the reporting of reclassifications out of accumulated other comprehensive income. Accordingly, an entity is required to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in net income if the amount being reclassified is required under GAAP to be reclassified in its entirety to net income. For other amounts that are not required under GAAP to be reclassified in their entirety to net income in the same reporting period, an entity is required to cross-reference other disclosures required under GAAP that provide additional detail about those amounts. The amendments in this ASU supersede the presentation requirements for reclassifications out of accumulated other comprehensive income in ASU 2011-05 and ASU 2011-12. ASU 2013-02 is effective for reporting periods beginning after December 15, 2012. We adopted ASU 2013-02 effective January 1, 2013. The adoption of ASU 2013-02 did not have an effect on our consolidated financial statements.
Forward-Looking Statements
Certain statements contained in this quarterly report on Form 10-Q, such as any statements about our confidence or strategies or our expectations about revenues, liabilities, results of operations, cash flows, ability to fund operations, profitability, ability to meet financial covenants, contracts or market opportunities, constitute forward-looking statements within the meaning of section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934.1934 (the “Exchange Act”). These forward-looking statements are based on our current expectations, assumptions, estimates and projections about our business and our industry. You can identify forward-looking statements by the use of words such as “may,” “should,” “will,” “could,” “estimates,” “predicts,” “potential,” “continue,” “anticipates,” “believes,” “plans,” “expects,” “future,” and “intends” and similar expressions which are intended to identify forward-looking statements.
The forward-looking statements contained herein are not guarantees of our future performance and are subject to a number of known and unknown risks, uncertainties and other factors disclosed in our annual report on Form 10-K for the year ended December 31, 2012.2013. Some of these risks, uncertainties and other factors are beyond our control and difficult to predict and could cause our actual results or achievements to differ materially from those expressed, implied or forecasted in the forward-looking statements.
All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained above and throughout this report. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. We do not intend to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Foreign currency translation
We conduct business in Canada through our wholly-owned subsidiary WCG, and as such, our cash flows and earnings are subject to fluctuations from changes in foreign currency exchange rates. We believe that the impact of currency fluctuations does not represent a significant risk to us given the size and scope of our current international operations. Therefore, we do not hedge against the possible impact of this risk. A 10% adverse change in the foreign currency exchange rate would not have a significant impact on our results of operations or financial position.
Interest rate and market risk
As of September 30, 2013,March 31, 2014, we had borrowings under our term loan of $60.0 million and borrowings under our revolving line of credit of $16.0 million. Borrowings under the Amended and Restated Credit Agreement accrue interest at LIBOR plus 2.25% per annum as of September 30, 2013.March 31, 2014. An increase of 1% in the LIBOR rate would cause an increase in interest expense of up to $3.4$3.0 million over the remaining term of the Amended and Restated Credit Agreement, which matures in 2018.
We have convertible senior subordinated notes of approximately $47.5 million outstanding at September 30, 2013March 31, 2014 in connection with an acquisition completed in 2007. These notes bear a fixed interest rate of 6.5%.
We assess the significance of interest rate market risk on a periodic basis and may implement strategies to manage such risk as we deem appropriate.
Concentration of credit risk
We provide government sponsored human services and non-emergency transportation services to individuals and families pursuant to approximately 560 contracts as of September 30, 2013. Contracts we enter into with governmental agencies and with other entities that contract with governmental agencies accounted for approximately 80% and 81% of our revenue for the nine months ended September 30, 2013 and 2012, respectively. The related contracts are subject to possible statutory and regulatory changes, rate adjustments, administrative rulings, rate freezes and funding reductions. Reductions in amounts paid under these contracts for our services or changes in methods or regulations governing payments for our services could materially adversely affect our revenue and profitability. For the nine months ended September 30, 2013, we conducted a portion of our operations in Canada through WCG. At September 30, 2013, approximately $8.6 million, or 5.9%, of our net assets were located in Canada. We are subject to the risks inherent in conducting business across national boundaries, any one of which could adversely impact our business. In addition to currency fluctuations, these risks include, among other things: (i) economic downturns; (ii) changes in or interpretations of local law, governmental policy or regulation; (iii) restrictions on the transfer of funds into or out of the country; (iv) varying tax systems; (v) delays from doing business with governmental agencies; (vi) nationalization of foreign assets; and (vii) government protectionism. We intend to continue to evaluate opportunities to establish additional operations in Canada. One or more of the foregoing factors could impair our current or future operations and, as a result, harm our overall business.
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 its disclosure controls and procedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report (September 30, 2013)(March 31, 2014) (“Disclosure Controls”). Based upon the Disclosure Controls evaluation, the principal executive officer and principal financial officer have concluded that the Disclosure Controls were effective in reaching a reasonable level of 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 Securities and Exchange Commission’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 principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in internal controls
The principal executive officer and principal financial officer also conducted an evaluation of the Company’s internal control over financial reporting (“Internal Control”) to determine whether any changes in Internal Control occurred during the quarter ended September 30, 2013March 31, 2014 that have materially affected or which are reasonably likely to materially affect Internal Control. Based on that evaluation, there has been no such change during the quarter ended September 30, 2013.
March 31, 2014.
(c) Limitations on the Effectiveness of Controls
Control systems, no matter how well conceived and operated, are designed to provide a reasonable, but not an absolute, level of assurance that the objectives of the control system are met. Further, 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 all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. The Company conducts periodic evaluations of its internal controls to enhance, where necessary, its procedures and controls.
PART II—OTHER INFORMATION
Item 1A. | Risk Factors. |
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013, which could materially affect our business, financial condition or future results. The risk factors in our Form 10-K for the year ended December 31, 2013 have not materially changed other than the additional risk factors set forth below. These changes should be read in conjunction with the risk factors included in our Form 10-K for the year ended December 31, 2013. The risks described in these reports are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.
The acquisition of Ingeus is subject to a number of obligations that the Company and Ingeus are required to complete. It is possible that these obligations may not be fulfilled, which could cause the termination of the Sale Agreement.
The Sale Agreement contains a number of customary conditions, such as the accuracy of representations and warranties in all material respects, that certain consents and approvals have been obtained, and other customary conditions, which must be met prior to the closing of the Ingues acquisition. Many of the conditions to consummation of the acquisition are not within our control, and we cannot predict when or if these conditions will be satisfied. If any of these conditions are not fulfilled or waived prior to the cutoff date set forth in the Sale Agreement (August 1, 2014), it is possible that the acquisition will not be consummated.
The failure to complete the acquisition of Ingeus could affect our stock price.
On March 31, 2014, we announced that we entered into an agreement to acquire Ingeus, with an expected close in the second quarter of 2014. Should the closing of the acquisition fail or be delayed, we may experience an adverse effect on our business or negative reactions from the financial markets, which may cause a decrease in the market price of our stock.
Failure to complete the acquisition of Ingeus could adversely affect our business.
If the acquisition is not completed, our ongoing business, financial condition or results of operations may be adversely affected, and we will be subject to several risks, including the following:
● | we will be required to pay certain costs related to the acquisition whether or not it is consummated, such as professional, legal and accounting fees, which costs could be substantial and for which we will receive little to no benefit; |
● | our management will have focused its attention on negotiating and preparing for the acquisition instead of pursuing other opportunities that could have been beneficial to us; and |
● | we may experience negative reactions from the financial markets, our customers and employees. |
We may be unable to integrate Ingeus into our businesses successfully and realize the anticipated benefits of the acquisition of Ingeus.
The acquisition involves the combination of two companies that currently operate in different geographic locations. We will be required to devote significant management attention and resources to integrating Ingeus with our business practices, culture and operations. Potential difficulties we may encounter as part of the integration process include the following:
● | the challenge of integrating complex systems, operating procedures, regulatory compliance programs and technology of the two companies in a seamless manner; and |
● | potential unknown liabilities, liabilities that are significantly larger than we currently anticipate and unforeseen increased expenses or delays associated with the acquisition, including one-time cash costs to integrate the two businesses. |
Accordingly, if the acquisition is consummated, the contemplated benefits may not be realized fully, or at all, or may take longer to realize than expected.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
Item 2. Unregistered SalesIssuer Purchases of Equity Securities and Use of Proceeds.
Dividends
The following table provides information with respect to common stock repurchased by us during the three months ended March 31, 2014:
Total Number of | ||||||||||||||||||
Total Number | Shares of Common Stock | Maximum Number of | ||||||||||||||||
of Shares of | Average Price | Purchased as Part of | Shares of Common Stock | |||||||||||||||
Common Stock | Paid per | Publicly Announced | that May Yet Be Purchased | |||||||||||||||
Period | Purchased | Share | Plans or Program | Under the Plans or Program (2) | ||||||||||||||
Month 1: | ||||||||||||||||||
January 1, 2014 | ||||||||||||||||||
to | ||||||||||||||||||
January 31, 2014 | 3,361 | (1) | $ | 24.77 | - | 243,900 | ||||||||||||
Month 2: | ||||||||||||||||||
February 1, 2014 | ||||||||||||||||||
to | ||||||||||||||||||
February 28, 2014 | 1,204 | (1) | $ | 26.15 | - | 243,900 | ||||||||||||
Month 3: | ||||||||||||||||||
March 1, 2014 | ||||||||||||||||||
to | ||||||||||||||||||
March 31, 2014 | 12,557 | (1) | $ | 28.28 | - | 243,900 | ||||||||||||
Total | 17,122 | $ | 27.44 | - | 243,900 |
(1) | The shares repurchased were acquired from employees in connection with the settlement of income tax and related benefit withholding obligations arising from vesting of restricted stock grants. |
(2) | Our board of directors approved a stock repurchase program in February 2007 for up to one million shares of our common stock. As of March 31, 2014, we spent approximately $14.4 million to purchase 756,100 shares of our common stock on the open market under this program. |
Dividends
Our existing debt agreement restricts the payment of dividends by the Company.
Item 6. | Exhibits. |
Item 6.Exhibits.
Exhibit |
| Description |
|
| |
|
| |
3.1(2) | Certificate of Elimination dated as of March 27, 2014. | |
4.1(2) | Amendment and Termination of Rights Agreement, dated as of | |
|
| |
|
| |
31.1 |
| Certification pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 of the Chief Executive Officer. |
31.2 |
| Certification pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 of the Chief Financial Officer. |
32.1 |
| Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer. |
|
|
|
32.2 |
| Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Financial Officer. |
101. INS | XBRL Instance Document | |
101.SCH | XBRL Schema Document | |
101.CAL | XBRL Calculation Linkbase Document | |
101.LAB | XBRL Label Linkbase Document | |
101.PRE | XBRL Presentation Linkbase Document | |
101.DEF | XBRL Definition Linkbase Document | |
____________
(1) |
| Incorporated by reference |
(2) | Incorporated by reference | |
|
| |
|
|
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: |
| By: |
| /s/ Warren S. Rustand |
Warren S. Rustand | ||||
|
|
Chief Executive Officer and Director | ||
|
| (Principal Executive Officer) | ||
Date: |
| By: |
| /s/ Robert E. Wilson |
Robert E. Wilson | ||||
|
|
Chief Financial Officer | ||
|
| (Principal Financial and Accounting Officer) |
EXHIBIT INDEX
Exhibit Number | Description | ||||||||
|
| ||||||||
|
| ||||||||
|
| ||||||||
|
| ||||||||
|
| ||||||||
4.1(2) | Amendment and Termination of Rights Agreement, dated as of March 27, 2014, by and between the Company and Computershare Trust Company, N.A., as Rights Agent. | ||||||||
31.1 |
| Certification pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 of the Chief Executive Officer. | |||||||
31.2 | Certification pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 of the Chief Financial Officer. | ||||||||
32.1 |
| Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Executive Officer. | |||||||
|
|
| |||||||
32.2 |
| Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, of the Chief Financial Officer. | |||||||
101. INS | XBRL Instance Document | ||||||||
101.SCH | XBRL Schema Document | ||||||||
101.CAL | XBRL Calculation Linkbase Document | ||||||||
101.LAB | XBRL Label Linkbase Document | ||||||||
101.PRE | XBRL Presentation Linkbase Document | ||||||||
101.DEF | XBRL Definition Linkbase Document | ||||||||
| |||||||||
(1) | |||||||||
| Incorporated by reference from an exhibit to the registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on | ||||||||
| |||||||||
(2) | Incorporated by reference from an exhibit to the registrant’s current report on Form 8-K filed with the Securities and Exchange Commission on |