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, 2016 and 2015, 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, 2015. For purposes of “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” references to Q3 2016 and Q3 2015 mean the three months ended September 30, 2016 and the three months ended September 30, 2015, respectively, and references to YTD 2016 and YTD 2015 mean the nine months ended September 30, 2016 and the nine months ended September 30, 2015, respectively. All amounts are presented in US dollars in thousands, with the exception of percentages, share and per share amounts, unless the context otherwise requires or otherwise noted.
Overview of our business
and recent developments
The Providence Service Corporation (“we”, the “Company” or “Providence”) is a holding company, which owns controlling and noncontrolling interests in companies which provide critical healthcare and workforce development services. In 2016, Providence, through its ownership of interests in subsidiaries and other companies, operated in three segments: Non-Emergency Transportation Services (“NET Services”), Workforce Development Services (“WD Services”) and Health Assessment Services (“HA Services”). As further discussed below, on October 19, 2016, the Company completed its CCHN Group Holdings Inc. (together with its subsidiaries, “Matrix” or “HA Services”) stock subscription transaction pursuant to which a third-party subscribed for a 53.2% equity interest in Matrix with Providence retaining a 46.8% equity interest in Matrix. Thus, the Company now owns a noncontrolling interest in Matrix, and the results of Matrix are presented within discontinued operations. The transaction valued Matrix at $537,500. We received approximately $381,163 and used a portion of the cash proceeds to repay in full our existing term loan and revolving credit facilities.
NET Services Contracts
As of November 2016, certain clients notified us that their existing contracts will not be renewed. As our recently renewed and awarded contracts have lower margins than these expiring contracts, we expect downward pressure on our operating income as a percentage of revenue starting in 2017. Earlier this year, NET Services launched numerous strategic and operational initiatives that we expect will partially offset the impact to profitability of these lost contracts. However, until these initiatives take effect, we expect NET Services to experience a decline in operating income as a percentage of revenue of approximately 100 to 125 basis points, beginning in the first quarter of 2017. In addition, a number of other contracts are scheduled to expire in the near term, and there can be no assurance that these contracts will be renewed on similar terms as the existing contracts, if at all. To the extent these initiatives take longer than expected or are unsuccessful, or we are unable to renew or replace expiring contracts, the expected decline in operating income as a percentage of revenue may be more significant and permanent in nature.
Critical accounting estimates
and policies
As of September 30, 2016, there has been no change in our critical accounting policies. 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, 2015.
Results of operations
Segment reporting.
Our operations are organized and reviewed by management along our segment lines, which historically were: NET Services, WD Services, HA Services and Human Services. Effective October 19, 2016, we relinquished our controlling interest in Matrix, which constituted our HA Services segment. Additionally, effective November 1, 2015, we completed the sale of our Human Services segment. Accordingly, the results of operations discussion set forth below includes the continuing operations of NET Services and WD Services segments. The HA Services segment and Human Services segment results of operations are discussed in the “Discontinued operations, net of tax” section set forth below.
Segment results are based on how our chief operating decision maker manages our business, makes operating decisions and evaluates operating performance. The operating results of the segments include revenue and expenses incurred by the segment, as well as an allocation of direct expenses incurred by our corporate division on behalf of the segment. Indirect expenses, including unallocated corporate functions and expenses, such as executive, finance, human resources, information technology and legal, as well as the results of our captive insurance company (the “Captive”) and elimination entries recorded in consolidation are reflected in Corporate and Other.
Consolidated Results
.
Q3 2016 compared to Q3 2015
The following table sets forth results of operations and the percentage of consolidated total revenues represented by items in our unaudited condensed consolidated statements of income for Q3 2016 and Q3 2015:
|
|
Three months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
Percentage
of Revenue
|
|
|
$
|
|
|
Percentag
e
of Revenue
|
|
Service revenue, net
|
|
|
412,512
|
|
|
|
100.0%
|
|
|
|
379,568
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service expense
|
|
|
378,729
|
|
|
|
91.8%
|
|
|
|
350,583
|
|
|
|
92.4%
|
|
General and administrative expense
|
|
|
17,320
|
|
|
|
4.2%
|
|
|
|
20,521
|
|
|
|
5.4%
|
|
Depreciation and amortization
|
|
|
6,670
|
|
|
|
1.6%
|
|
|
|
5,882
|
|
|
|
1.5%
|
|
Total operating expenses
|
|
|
402,719
|
|
|
|
97.6%
|
|
|
|
376,986
|
|
|
|
99.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
9,793
|
|
|
|
2.4%
|
|
|
|
2,582
|
|
|
|
0.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
702
|
|
|
|
0.2%
|
|
|
|
515
|
|
|
|
0.1%
|
|
Equity in net loss of investees
|
|
|
1,517
|
|
|
|
0.4%
|
|
|
|
4,465
|
|
|
|
1.2%
|
|
Gain on foreign currency transactions
|
|
|
(482
|
)
|
|
|
-0.1%
|
|
|
|
(736
|
)
|
|
|
-0.2%
|
|
Income from continuing operations before
income taxes
|
|
|
8,056
|
|
|
|
2.0%
|
|
|
|
(1,662
|
)
|
|
|
-0.4%
|
|
Provision for income taxes
|
|
|
4,543
|
|
|
|
1.1%
|
|
|
|
2,495
|
|
|
|
0.7%
|
|
Income (loss) from continuing operations, net of tax
|
|
|
3,513
|
|
|
|
0.9%
|
|
|
|
(4,157
|
)
|
|
|
-1.1%
|
|
Discontinued operations, net of tax
|
|
|
(2,562
|
)
|
|
|
-0.6%
|
|
|
|
(1,253
|
)
|
|
|
-0.3%
|
|
Net income (loss)
|
|
|
951
|
|
|
|
0.2%
|
|
|
|
(5,410
|
)
|
|
|
-1.4%
|
|
Net loss attributable to noncontrolling interest
|
|
|
(301
|
)
|
|
|
-0.1%
|
|
|
|
(161
|
)
|
|
|
0.0%
|
|
Net income (loss) attributable to Providence
|
|
|
650
|
|
|
|
0.2%
|
|
|
|
(5,571
|
)
|
|
|
-1.5%
|
|
Service revenue, net.
Consolidated service revenue, net for Q3 2016 increased $32,944, or 8.7%, compared to Q3 2015. Revenue for Q3 2016 compared to Q3 2015 included an increase in revenue attributable to NET Services of $40,391. This increase in revenue was partially offset by a decrease in revenue attributable to WD Services of $7,587. Excluding the effects of changes in currency exchange rates, consolidated service revenue increased 12.0% in Q3 2016 compared to Q3 2015.
Total operating expenses.
Consolidated operating expenses for Q3 2016 increased $25,733, or 6.8%, compared to Q3 2015. Operating expenses for Q3 2016 compared to Q3 2015 included an increase in expenses attributable to NET Services of $37,256 and an increase in operating expenses of Corporate and Other of $1,623. These increases in operating expenses were partially offset by a decrease in operating expenses of WD Services of $13,146.
Operating income.
Consolidated operating income for Q3 2016 increased $7,211 compared to Q3 2015. The increase was primarily attributable to a decreased operating loss in Q3 2016 as compared to Q3 2015 of WD Services of $5,559 and increased operating income of NET Services of $3,135. These changes were partially offset by an increase in Corporate and Other operating loss of $1,483.
Interest expense, net.
Consolidated interest expense, net for Q3 2016 increased $187, or 36.3%, compared to Q3 2015. The increase was primarily related to higher commitment fees on our revolving credit facility for Q3 2016 as compared to Q3 2015.
Equity in net loss of investee
s
.
Equity in net loss of investees primarily relates to our investment in Mission Providence. Mission Providence began providing services in July 2015 and has incurred significant costs to date in order to commence operations. We record 75% of Mission Providence’s profit or loss.
Gain
on foreign currency trans
actions
.
The foreign currency gains of $482 and $736 for Q3 2016 and Q3 2015, respectively, were primarily due to translation adjustments of our foreign subsidiaries.
Provision for income taxes.
Our effective tax rate from continuing operations for Q3 2016 was 56.4%. The effective tax rate exceeded the United States (“US”) federal statutory rate of 35% primarily due to foreign net operating losses (including equity investment losses) for which the future income tax benefit currently cannot be recognized, significant losses in foreign jurisdictions with tax rates lower than the US rate of 35%, state income taxes and certain non-deductible expenses. We recognized an income tax provision from continuing operations for Q3 2015 despite having a pretax loss from continuing operations because of significant nondeductible expenses recognized during Q3 2015 and the reduction of pretax income from continuing operations resulting from the HA Services and Human Services segments being presented as discontinued operations as of September 30, 2015.
Discontinued operations, net of tax.
The following table summarizes the major classes of line items included in income from discontinued operations, net of tax, and the percentage of service revenue from discontinued operations, for Q3 2016 and Q3 2015:
|
|
Three months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Human
Services
Segment ($)
|
|
|
HA Services
Segment ($)
|
|
|
Total Discontinued
Operations ($)
|
|
|
Percentage of
Revenue
|
|
|
Human
Services
Segment ($)
|
|
|
HA Services
Segment ($)
|
|
|
Total Discontinued
Operations ($)
|
|
|
Percentage of
Revenue
|
|
Service revenue, net
|
|
|
-
|
|
|
|
52,557
|
|
|
|
52,557
|
|
|
|
100.0%
|
|
|
|
84,722
|
|
|
|
52,882
|
|
|
|
137,604
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service expense
|
|
|
-
|
|
|
|
38,703
|
|
|
|
38,703
|
|
|
|
73.6%
|
|
|
|
77,890
|
|
|
|
40,134
|
|
|
|
118,024
|
|
|
|
85.8%
|
|
General and administrative expense
|
|
|
7,463
|
|
|
|
1,505
|
|
|
|
8,968
|
|
|
|
17.1%
|
|
|
|
6,807
|
|
|
|
804
|
|
|
|
7,611
|
|
|
|
5.5%
|
|
Asset impairment charge
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0%
|
|
|
|
1,593
|
|
|
|
-
|
|
|
|
1,593
|
|
|
|
1.2%
|
|
Depreciation and amortization
|
|
|
-
|
|
|
|
5,359
|
|
|
|
5,359
|
|
|
|
10.2%
|
|
|
|
1,217
|
|
|
|
7,488
|
|
|
|
8,705
|
|
|
|
6.3%
|
|
Interest expense, net
|
|
|
-
|
|
|
|
2,770
|
|
|
|
2,770
|
|
|
|
5.3%
|
|
|
|
795
|
|
|
|
3,293
|
|
|
|
4,088
|
|
|
|
3.0%
|
|
Loss from discontinued operations
before provision for income taxes
|
|
|
(7,463
|
)
|
|
|
4,220
|
|
|
|
(3,243
|
)
|
|
|
-6.2%
|
|
|
|
(3,580
|
)
|
|
|
1,163
|
|
|
|
(2,417
|
)
|
|
|
-1.8%
|
|
Provision (benefit) for income taxes
|
|
|
(2,428
|
)
|
|
|
1,747
|
|
|
|
(681
|
)
|
|
|
-1.3%
|
|
|
|
(1,789
|
)
|
|
|
625
|
|
|
|
(1,164
|
)
|
|
|
-0.8%
|
|
Discontinued operations, net of tax
|
|
|
(5,035
|
)
|
|
|
2,473
|
|
|
|
(2,562
|
)
|
|
|
-4.9%
|
|
|
|
(1,791
|
)
|
|
|
538
|
|
|
|
(1,253
|
)
|
|
|
-0.9%
|
|
The results above include the activity of our HA Services segment and our Human Services segment. Discontinued operations, net of tax for our HA Services segment totaled $2,473 and $538 for Q3 2016 and Q3 2015, respectively. This included transaction costs of $841 in Q3 2016 related to the relinquishment of our controlling interest in Matrix. Discontinued operations, net of tax for our Human Services segment totaled negative $5,035 and negative $1,791 for Q3 2016 and Q3 2015, respectively. This included an accrual of $6,000 with respect to potential indemnification claims, legal costs of $793 related to these potential claims and transaction related expenses of $670 in Q3 2016. Interest expense, net in the table above includes an allocation of interest expense related to the net proceeds from the sale of the Human Services segment and relinquishment of the controlling interest in Matrix, which constituted our HA Services segment, which were required to be used to repay debt under the terms of amendments to the Company’s credit facility.
Net loss attributable
to noncontrolling interest
s
.
We have minority interests in certain foreign companies, some of which are currently experiencing losses. As such we have a net loss attributable to noncontrolling interests.
YTD 201
6
compared to YTD 201
5
The following table sets forth results of operations and the percentage of consolidated total revenues represented by items in our unaudited condensed consolidated statements of income for YTD 2016 and YTD 2015:
|
|
Nine months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
Percentage of Revenue
|
|
|
$
|
|
|
Percentage of Revenue
|
|
Service revenue, net
|
|
|
1,192,930
|
|
|
|
100.0%
|
|
|
|
1,104,799
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service expense
|
|
|
1,095,515
|
|
|
|
91.8%
|
|
|
|
1,004,329
|
|
|
|
90.9%
|
|
General and administrative expense
|
|
|
52,548
|
|
|
|
4.4%
|
|
|
|
56,998
|
|
|
|
5.2%
|
|
Depreciation and amortization
|
|
|
20,058
|
|
|
|
1.7%
|
|
|
|
17,759
|
|
|
|
1.6%
|
|
Total operating expenses
|
|
|
1,168,121
|
|
|
|
97.9%
|
|
|
|
1,079,086
|
|
|
|
97.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
24,809
|
|
|
|
2.1%
|
|
|
|
25,713
|
|
|
|
2.3%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
2,339
|
|
|
|
0.2%
|
|
|
|
2,763
|
|
|
|
0.3%
|
|
Equity in net loss of investees
|
|
|
5,693
|
|
|
|
0.5%
|
|
|
|
8,008
|
|
|
|
0.7%
|
|
Gain on foreign currency transactions
|
|
|
(1,332
|
)
|
|
|
-0.1%
|
|
|
|
(1,131
|
)
|
|
|
-0.1%
|
|
Income from continuing operations before
income taxes
|
|
|
18,109
|
|
|
|
1.5%
|
|
|
|
16,073
|
|
|
|
1.5%
|
|
Provision for income taxes
|
|
|
12,051
|
|
|
|
1.0%
|
|
|
|
12,918
|
|
|
|
1.2%
|
|
Income from continuing operations, net of tax
|
|
|
6,058
|
|
|
|
0.5%
|
|
|
|
3,155
|
|
|
|
0.3%
|
|
Discontinued operations, net of tax
|
|
|
1,017
|
|
|
|
0.1%
|
|
|
|
4,258
|
|
|
|
0.4%
|
|
Net income
|
|
|
7,075
|
|
|
|
0.6%
|
|
|
|
7,413
|
|
|
|
0.7%
|
|
Net loss (income) attributable to noncontrolling interest
|
|
|
433
|
|
|
|
0.0%
|
|
|
|
(114
|
)
|
|
|
0.0%
|
|
Net income attributable to Providence
|
|
|
7,508
|
|
|
|
0.6%
|
|
|
|
7,299
|
|
|
|
0.7%
|
|
Service revenue, net.
Consolidated service revenue, net for YTD 2016 increased $88,131, or 8.0%, compared to YTD 2015. Revenue for YTD 2016 compared to YTD 2015 included an increase in revenue attributable to NET Services of $115,081. This increase in revenue was partially offset by a decrease in revenue attributable to WD Services of $27,047. Excluding the effects of changes in currency exchange rates, consolidated service revenue increased 9.9% for YTD 2016 compared to YTD 2015.
Total operating expenses.
Consolidated operating expenses for YTD 2016 increased $89,035, or 8.3%, compared to YTD 2015. Operating expenses for YTD 2016 compared to YTD 2015 included an increase in expenses attributable to NET Services of $115,506. This increase in operating expenses was partially offset by a decrease in operating expenses of WD Services of $24,925 and a decrease in operating expenses of Corporate and Other of $1,546.
Operating income.
Consolidated operating income for YTD 2016 decreased $904, or 3.5%, compared to YTD 2015. The decrease was primarily attributable to decreases in operating income for YTD 2016 as compared to YTD 2015 of NET Services of $425 and WD Services of $2,122. These decreases were partially offset by a decrease in Corporate and Other operating loss of $1,643.
Interest expense, net.
Consolidated interest expense, net for YTD 2016 decreased $424, or 15.3%, compared to YTD 2015. The decrease was primarily related to the repayment of the Company’s note payable to a related party in February 2015, partially offset by increased commitment fees on our revolving credit facility.
Equity in net loss of investee
s
.
Equity in net loss of investees primarily relates to our investment in Mission Providence. Mission Providence began providing services in July 2015 and has incurred significant costs to date in order to commence operations. We record 75% of Mission Providence’s profit or loss.
Gain
on foreign currency trans
actions
.
The foreign currency gain of $1,332 and $1,131 for YTD 2016 and YTD 2015, respectively, were primarily due to translation adjustments of our foreign subsidiaries.
Provision for income taxes.
Our effective tax rate from continuing operations for YTD 2016 and YTD 2015 was 66.5% and 80.4%, respectively. The effective tax rate exceeded the US federal statutory rate of 35% for these periods primarily due to foreign net operating losses (including equity investment losses) for which the future income tax benefit currently cannot be recognized, significant losses in foreign jurisdictions with tax rates lower than the US rate of 35%, state income taxes, and certain non-deductible expenses.
Discontinued operations, net of tax.
The following table summarizes the major classes of line items included in income from discontinued operations, net of tax, and the percentage of service revenue from discontinued operations, for YTD 2016 and YTD 2015:
|
|
Nine months ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Human
Services
Segment ($)
|
|
|
HA Services
Segment ($)
|
|
|
Total Discontinued
Operations ($)
|
|
|
Percentage of
Revenue
|
|
|
Human
Services
Segment ($)
|
|
|
HA Services
Segment ($)
|
|
|
Total Discontinued
Operations ($)
|
|
|
Percentage of
Revenue
|
|
Service revenue, net
|
|
|
-
|
|
|
|
155,421
|
|
|
|
155,421
|
|
|
|
100.0%
|
|
|
|
260,701
|
|
|
|
165,718
|
|
|
|
426,419
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service expense
|
|
|
-
|
|
|
|
113,455
|
|
|
|
113,455
|
|
|
|
73.0%
|
|
|
|
233,710
|
|
|
|
124,541
|
|
|
|
358,251
|
|
|
|
84.0%
|
|
General and administrative expense
|
|
|
7,463
|
|
|
|
2,823
|
|
|
|
10,286
|
|
|
|
6.6%
|
|
|
|
17,047
|
|
|
|
2,086
|
|
|
|
19,133
|
|
|
|
4.5%
|
|
Asset impairment charge
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
0.0%
|
|
|
|
1,593
|
|
|
|
-
|
|
|
|
1,593
|
|
|
|
0.4%
|
|
Depreciation and amortization
|
|
|
-
|
|
|
|
21,121
|
|
|
|
21,121
|
|
|
|
13.6%
|
|
|
|
4,831
|
|
|
|
21,855
|
|
|
|
26,686
|
|
|
|
6.3%
|
|
Interest expense, net
|
|
|
-
|
|
|
|
8,204
|
|
|
|
8,204
|
|
|
|
5.3%
|
|
|
|
2,429
|
|
|
|
9,964
|
|
|
|
12,393
|
|
|
|
2.9%
|
|
Loss from discontinued operations
before provision for income taxes
|
|
|
(7,463
|
)
|
|
|
9,818
|
|
|
|
2,355
|
|
|
|
1.5%
|
|
|
|
1,091
|
|
|
|
7,272
|
|
|
|
8,363
|
|
|
|
2.0%
|
|
Provision (benefit) for income taxes
|
|
|
(2,428
|
)
|
|
|
3,766
|
|
|
|
1,338
|
|
|
|
0.9%
|
|
|
|
756
|
|
|
|
3,349
|
|
|
|
4,105
|
|
|
|
1.0%
|
|
Discontinued operations, net of tax
|
|
|
(5,035
|
)
|
|
|
6,052
|
|
|
|
1,017
|
|
|
|
0.7%
|
|
|
|
335
|
|
|
|
3,923
|
|
|
|
4,258
|
|
|
|
1.0%
|
|
The results above include the activity of our HA Services segment and our Human Services segment. Discontinued operations, net of tax for our HA Services segment totaled $6,052 and $3,923 for YTD 2016 and YTD 2015, respectively. This included transaction costs of $841 for YTD 2016 related to the relinquishment of our controlling interest in Matrix. Discontinued operations, net of tax for our Human Services segment totaled negative $5,035 and $335 for YTD 2016 and YTD 2015, respectively. This included an accrual of $6,000 with respect to potential indemnification claims, legal costs of $793 related to these potential claims and transaction related expenses of $670 for YTD 2016. Interest expense, net, in the table above includes an allocation of interest expense related to the net proceeds from the sale of the Human Services segment and relinquishment of the controlling interest in Matrix, which constituted the HA Services segment, which were required to be used to repay debt under the terms of amendments to the Company’s credit facility.
Net loss attributable
to noncontrolling interest
s
.
We have minority interests in certain foreign companies, some of which are currently experiencing losses. As such we have a net loss attributable to noncontrolling interests.
Segment Results.
The following analysis includes discussion of each of our segments.
NET Services
NET Services segment financial results are as follows for Q3 2016 and Q3 2015:
|
|
Three Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
Percentage of
Revenue
|
|
|
$
|
|
|
Percentage of
Revenue
|
|
Service revenue, net
|
|
|
317,521
|
|
|
|
100.0%
|
|
|
|
277,130
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service expense
|
|
|
294,160
|
|
|
|
92.6%
|
|
|
|
257,518
|
|
|
|
92.9%
|
|
General and administrative expense
|
|
|
2,860
|
|
|
|
0.9%
|
|
|
|
2,908
|
|
|
|
1.0%
|
|
Depreciation and amortization
|
|
|
3,051
|
|
|
|
1.0%
|
|
|
|
2,389
|
|
|
|
0.9%
|
|
Operating income
|
|
|
17,450
|
|
|
|
5.5%
|
|
|
|
14,315
|
|
|
|
5.2%
|
|
Service revenue, net.
Service revenue, net for our NET Services segment in Q3 2016 increased $40,391, or 14.6%, compared to Q3 2015. The increase was primarily related to the impact of new contracts which contributed $21,554 of revenue in 2016, including contracts in California and Florida, partially offset by the loss of certain contracts which resulted in a decrease in revenue of $16,849, and an increase in existing contracts of $35,686 due to the net impact of membership and rate changes.
Service expense
.
Service expense for our NET Services segment included the following for Q3 2016 and Q3 2015:
|
|
Three Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
Percentage of
Revenue
|
|
|
$
|
|
|
Pe
rcentage of
Revenue
|
|
Purchased services
|
|
|
242,124
|
|
|
|
76.3%
|
|
|
|
212,175
|
|
|
|
76.6%
|
|
Payroll and related costs
|
|
|
41,833
|
|
|
|
13.2%
|
|
|
|
36,553
|
|
|
|
13.2%
|
|
Other operating expenses
|
|
|
10,130
|
|
|
|
3.2%
|
|
|
|
8,681
|
|
|
|
3.1%
|
|
Stock-based compensation
|
|
|
73
|
|
|
|
0.0%
|
|
|
|
109
|
|
|
|
0.0%
|
|
Total service expense
|
|
|
294,160
|
|
|
|
92.6%
|
|
|
|
257,518
|
|
|
|
92.9%
|
|
Service expense for Q3 2016 increased $36,642, or 14.2%, compared to Q3 2015. The increase in service expense was primarily attributable to an increase in purchased transportation services due primarily to higher volume. Additionally, our payroll and related costs increased in Q3 2016 as compared to Q3 2015 primarily due to the hiring of employees to support new contracts and increased call volume associated with increased utilization, as well as a long-term incentive plan for management put into place in the fourth quarter of 2015. Our other operating expenses also increased in Q3 2016 as compared to Q3 2015 due to volume.
The Company also incurred $666 of costs related to external resources used in the planning and design of NET Services member experience and value enhancement initiative.
General and administrative expense.
General and administrative expenses in Q3 2016 decreased $48, or 1.7%, as compared to Q3 2015. As a percentage of revenue, general and administrative expense decreased slightly from 1.0% for Q3 2015 to 0.9% for Q3 2016.
Depreciation and amortization expense.
Depreciation and amortization expenses increased $662 primarily due to the addition of long-lived assets in our expanded call centers. As a percentage of revenue, depreciation and amortization increased slightly from 0.9% for Q3 2015 to 1.0% for Q3 2016.
NET Services segment financial results are as follows for YTD 2016 and YTD 2015:
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
Percentage of
Revenue
|
|
|
$
|
|
|
Percentage of
Revenue
|
|
Service revenue, net
|
|
|
917,661
|
|
|
|
100.0%
|
|
|
|
802,580
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service expense
|
|
|
846,815
|
|
|
|
92.3%
|
|
|
|
733,696
|
|
|
|
91.4%
|
|
General and administrative expense
|
|
|
8,483
|
|
|
|
0.9%
|
|
|
|
7,959
|
|
|
|
1.0%
|
|
Depreciation and amortization
|
|
|
8,858
|
|
|
|
1.0%
|
|
|
|
6,995
|
|
|
|
0.9%
|
|
Operating income
|
|
|
53,505
|
|
|
|
5.8%
|
|
|
|
53,930
|
|
|
|
6.7%
|
|
Service revenue, net.
Service revenue, net for our NET Services segment for YTD 2016 increased $115,081, or 14.3%, compared to YTD 2015. The increase was primarily related to an increase in revenue from existing contracts of $98,020 which was due to the net impact of membership and rate changes. Additionally, revenue increased due to the impact of new contracts totaling $50,576 that commenced in 2015 and 2016, including contracts in California, Florida, Iowa and Michigan; partially offset by the loss of certain contracts which resulted in a decrease in revenue of $33,515.
Service expense
.
Service expense for our NET Services segment included the following for YTD 2016 and YTD 2015:
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
Percentage of
Revenue
|
|
|
$
|
|
|
Percentage of
Revenue
|
|
Purchased services
|
|
|
695,438
|
|
|
|
75.8%
|
|
|
|
603,399
|
|
|
|
75.2%
|
|
Payroll and related costs
|
|
|
122,117
|
|
|
|
13.3%
|
|
|
|
103,920
|
|
|
|
12.9%
|
|
Other operating expenses
|
|
|
29,032
|
|
|
|
3.2%
|
|
|
|
26,014
|
|
|
|
3.2%
|
|
Stock-based compensation
|
|
|
228
|
|
|
|
0.0%
|
|
|
|
363
|
|
|
|
0.0%
|
|
Total service expense
|
|
|
846,815
|
|
|
|
92.3%
|
|
|
|
733,696
|
|
|
|
91.4%
|
|
Service expense for YTD 2016 increased $113,119, or 15.4%, compared to YTD 2015. The increase in service expense was primarily attributable to an increase in purchased transportation services due primarily to higher volume. Purchased transportation services as a percentage of revenue increased slightly, primarily as a result of increased member utilization. Additionally, our payroll and related costs increased for YTD 2016 as compared to YTD 2015 primarily due to the hiring of employees to support new contracts and increased call volume associated with increased utilization, as well as a long-term incentive plan for management put into place in the fourth quarter of 2015. Our other operating expenses also increased for YTD 2016 as compared to YTD 2015 due to volume.
The Company also incurred $1,231 of costs related to external resources used in the planning and design of NET Services member experience and value enhancement initiative.
General and administrative expense.
General and administrative expenses for YTD 2016 increased $524, or 6.6%, as compared to YTD 2015, due to increased facility costs resulting from the overall growth of our operations. As a percentage of revenue, general and administrative expense decreased slightly from 1.0% for YTD 2015 to 0.9% for YTD 2016.
Depreciation and amortization expense.
Depreciation and amortization expenses increased $1,863 primarily due to the addition of long-lived assets in our expanded call centers. As a percentage of revenue, depreciation and amortization increased slightly from 0.9% for YTD 2015 to 1.0% for YTD 2016.
WD Services
WD Services segment financial results are as follows for Q3 2016 and Q3 2015:
|
|
Three Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
Percentage of
Revenue
|
|
|
$
|
|
|
Percentage of
Revenue
|
|
Service revenue, net
|
|
|
94,960
|
|
|
|
100.0%
|
|
|
|
102,547
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service expense
|
|
|
84,051
|
|
|
|
88.5%
|
|
|
|
95,773
|
|
|
|
93.4%
|
|
General and administrative expense
|
|
|
6,780
|
|
|
|
7.1%
|
|
|
|
8,260
|
|
|
|
8.1%
|
|
Depreciation and amortization
|
|
|
3,497
|
|
|
|
3.7%
|
|
|
|
3,441
|
|
|
|
3.4%
|
|
Operating income (loss)
|
|
|
632
|
|
|
|
0.7%
|
|
|
|
(4,927
|
)
|
|
|
-4.8%
|
|
Service revenue, net.
Service revenue, net for our WD Services segment in Q3 2016 decreased $7,587, or 7.4%, compared to Q3 2015. The decrease in Q3 2016 compared to Q3 2015 was primarily related to the impact of the decrease in the value of the British pound to the US dollar in Q3 2016 as compared to Q3 2015. Excluding the effects of changes in currency exchange rates, service revenue, net increased 4.8% in Q3 2016 compared to Q3 2015. The increase, after removing the impact of changes in the exchange rates, was primarily due to the growth of certain summer youth programs in Q3 2016 as compared to Q3 2015, partially offset by declining referrals and an altered pricing structure under the segment’s primary employability program in the United Kingdom, as well as lower revenue under the segment’s offender rehabilitation program. WD Services recognized revenue of $5,367 in Q3 2016 under its offender rehabilitation program related to the finalization of a contractual adjustment for the prior contract years ending March 31, 2015 and 2016, which partially offset the decline in revenue for the quarter.
Service expense
.
Service expense for our WD Services segment included the following for Q3 2016 and Q3 2015:
|
|
Three Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
Percentage of
Revenue
|
|
|
$
|
|
|
Percentage of
Revenue
|
|
Payroll and related costs
|
|
|
47,854
|
|
|
|
50.4%
|
|
|
|
61,138
|
|
|
|
59.6%
|
|
Purchased services
|
|
|
26,004
|
|
|
|
27.4%
|
|
|
|
20,516
|
|
|
|
20.0%
|
|
Other operating expenses
|
|
|
10,166
|
|
|
|
10.7%
|
|
|
|
12,562
|
|
|
|
12.2%
|
|
Stock-based compensation
|
|
|
27
|
|
|
|
0.0%
|
|
|
|
1,557
|
|
|
|
1.5%
|
|
Total service expense
|
|
|
84,051
|
|
|
|
88.5%
|
|
|
|
95,773
|
|
|
|
93.4%
|
|
Service expense in Q3 2016 decreased $11,722, or 12.2%, compared to Q3 2015. Payroll and related costs decreased in Q3 2016 compared to Q3 2015 primarily due to the redundancy plans implemented in the fourth quarter of 2015 that were designed to better align headcount with service delivery volumes, partially offset by higher payroll expense in France. Purchased services increased in Q3 2016 compared to Q3 2015 primarily as a result of subcontractors used to deliver services under our summer youth programs which experienced growth in 2016. Other operating costs decreased for Q3 2016 as compared to Q3 2015 primarily due to decreased information technology and communication costs driven by the overall decrease in headcount. Stock-based compensation decreased $1,530 in Q3 2016 as compared to Q3 2015 due to the settlement of outstanding awards in the fourth quarter of 2015 in relation to the separation of two executives.
General and administrative expense.
General and administrative expense in Q3 2016 decreased $1,480, or 17.9%, compared to Q3 2015. This decrease was primarily due to decreased facility costs associated with office closures to further align facility costs with service delivery volumes.
Depreciation and amortization expense.
Depreciation and amortization expense for Q3 2016 increased $56, or 1.6% compared to Q3 2015. The increase was primarily attributable to the depreciation of capital expenditures incurred related to new contracts in France as well as the offender rehabilitation program.
WD Services segment financial results are as follows for YTD 2016 and YTD 2015:
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
Percentage of
Revenue
|
|
|
$
|
|
|
Percentage of
Revenue
|
|
Service revenue, net
|
|
|
275,293
|
|
|
|
100.0%
|
|
|
|
302,340
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service expense
|
|
|
247,797
|
|
|
|
90.0%
|
|
|
|
273,312
|
|
|
|
90.4%
|
|
General and administrative expense
|
|
|
23,236
|
|
|
|
8.4%
|
|
|
|
23,469
|
|
|
|
7.8%
|
|
Depreciation and amortization
|
|
|
10,912
|
|
|
|
4.0%
|
|
|
|
10,089
|
|
|
|
3.3%
|
|
Operating loss
|
|
|
(6,652
|
)
|
|
|
-2.4%
|
|
|
|
(4,530
|
)
|
|
|
-1.5%
|
|
Service revenue, net.
Service revenue, net for our WD Services segment for YTD 2016 decreased $27,047 or 8.9%, compared to YTD 2015. Excluding the effects of changes in currency exchange rates service revenue decreased 1.8% for YTD 2016 compared to YTD 2015. After removing the impact of changes in the exchange rates, the decrease for YTD 2016 compared to YTD 2015 was primarily related to revenue declines associated with declining referrals and an altered pricing structure under the segment’s primary employability program in the United Kingdom. This decrease was partially offset by two new contracts in France which began in 2015 and growth of certain spring and summer youth programs in 2016. WD Services additionally recognized revenue of $5,367 for YTD 2016 under its offender rehabilitation program related to the finalization of a contractual adjustment for the prior contract years ending March 31, 2015 and 2016, which partially offset the decline in revenue under this contract for YTD 2016.
Service expense
.
Service expense for our WD Services segment included the following for YTD 2016 and YTD 2015:
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
Percentage of
Revenue
|
|
|
$
|
|
|
Percentage of
Revenue
|
|
Payroll and related costs
|
|
|
162,542
|
|
|
|
59.0%
|
|
|
|
177,931
|
|
|
|
58.9%
|
|
Purchased services
|
|
|
53,210
|
|
|
|
19.3%
|
|
|
|
57,387
|
|
|
|
19.0%
|
|
Other operating expenses
|
|
|
31,993
|
|
|
|
11.6%
|
|
|
|
33,320
|
|
|
|
11.0%
|
|
Stock-based compensation
|
|
|
52
|
|
|
|
0.0%
|
|
|
|
4,674
|
|
|
|
1.5%
|
|
Total service expense
|
|
|
247,797
|
|
|
|
90.0%
|
|
|
|
273,312
|
|
|
|
90.4%
|
|
Service expense for YTD 2016 decreased $25,515, or 9.3%, compared to YTD 2015. Payroll and related costs decreased primarily as a result of the redundancy plans implemented in the fourth quarter of 2015 that were designed to better align headcount with service delivery volumes. Partially offsetting these decreases was increased payroll and related costs associated with a significant new offender rehabilitation program that began in 2015, $4,741 in termination benefits related to two redundancy plans and higher payroll expense in France. Purchased services decreased $4,177 for YTD 2016 compared to YTD 2015 primarily as a result of a decline in client referrals under our primary employability program in the United Kingdom which required less use of outsourced services. Stock-based compensation decreased $4,622 for YTD 2016 as compared to YTD 2015 due to the settlement of outstanding awards in the fourth quarter of 2015 in relation to the separation of two executives.
General and administrative expense.
General and administrative expense for YTD 2016 decreased $233, or 1.0%, compared to YTD 2015. This decrease was primarily due to decreased facility costs associated with office closures to further align facility costs with service delivery volumes. This decrease was partially offset by additional facility costs related to the growth associated with our new programs.
Depreciation and amortization expense.
Depreciation and amortization expense for YTD 2016 increased $823, or 8.2%, compared to YTD 2015. The increase was primarily attributable to the depreciation of capital expenditures incurred related to new contracts in France as well as the offender rehabilitation program.
Corporate and Other
Corporate and Other includes the headcount and professional service costs incurred at the holding company level, at the Captive, and elimination entries to account for inter-segment transactions. Corporate and Other financial results are as follows for Q3 2016 and Q3 2015:
|
|
Three Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
Service revenue, net (a)
|
|
|
31
|
|
|
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
Service expense
|
|
|
518
|
|
|
|
(2,708
|
)
|
General and administrative expense
|
|
|
7,680
|
|
|
|
9,353
|
|
Depreciation and amortization
|
|
|
122
|
|
|
|
52
|
|
Operating loss
|
|
|
(8,289
|
)
|
|
|
(6,806
|
)
|
(a)
|
Negative amounts are present for this line item due to elimination entries that are included in Corporate and Other. Offsetting amounts are reflected in the finanical results of our operating segments.
|
Operating loss.
Corporate and Other operating loss in Q3 2016 increased by $1,483, or 21.8%, as compared to Q3 2015. Service expense for Q3 2016 increased as compared to Q3 2015 due primarily to Q3 2015 including a benefit due to favorable claims experience of our self-insured programs. General and administrative expense decreased in Q3 2016 as compared to Q3 2015 primarily as a result of decreased accounting and professional fees, primarily related to costs incurred in 2015 to integrate acquired companies into the Company’s assessment of internal control effectiveness program, which was partially offset by an increase in cash-settled stock-based compensation expense of $385. General and administrative expense additionally includes $899 and $1,019 of expense related to a shareholder lawsuit in Q3 2016 and Q3 2015, respectively.
Corporate and Other financial results are as follows for YTD 2016 and YTD 2015:
|
|
Nine Months Ended September 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
Service revenue, net (a)
|
|
|
(24
|
)
|
|
|
(121
|
)
|
|
|
|
|
|
|
|
|
|
Service expense
|
|
|
903
|
|
|
|
(2,679
|
)
|
General and administrative expense
|
|
|
20,829
|
|
|
|
25,570
|
|
Depreciation and amortization
|
|
|
288
|
|
|
|
675
|
|
Operating loss
|
|
|
(22,044
|
)
|
|
|
(23,687
|
)
|
(a)
|
Negative amounts are present for this line item due to elimination entries that are included in Corporate and Other. Offsetting amounts are reflected in the finanical results of our operating segments.
|
Operating loss.
Corporate and Other operating loss for YTD 2016 decreased by $1,643, or 6.9%, as compared to YTD 2015. Service expense for YTD 2016 increased as compared to YTD 2015 due primarily to YTD 2015 including a benefit for favorable claims experience of our self-insured programs. General and administrative expense decreased for YTD 2016 as compared to YTD 2015 primarily due to decreases in cash-settled and share-settled stock-based compensation expense, as well as accounting costs and professional fees incurred in 2015 primarily related to the integration of acquired companies into the Company’s assessment of internal control effectiveness program. General and administrative expense includes $1,043 and $1,019 of expense related to a shareholder lawsuit in YTD 2016 and YTD 2015, respectively.
S
easonality
Our quarterly operating results and operating cash flows normally fluctuate due in part to seasonal factors, uneven demand for services and the timing of new contracts, which impact the amount of revenues earned and expenses incurred. NET Services experiences fluctuations in demand during the summer, winter and holiday seasons. Due to higher demand in the summer months, lower demand during the winter and holiday seasons, and a primarily fixed revenue stream based on a per member, per month payment structure, NET Services normally experiences lower operating margins during the summer season and higher operating margins during the winter and holiday seasons. WD Services is impacted by both the timing of commencement and expiration of major contracts. Under many of WD Services’ contracts in new service lines, we invest significant sums of money in personnel, leased office space, purchased or developed technology, and other costs, and generally incur these costs prior to commencing services and receiving payments. This results in significant variability in financial performance and cash flows between quarters and for comparative periods. It is expected that future contracts will be structured in a similar fashion. In addition, under the majority of WD Services’ contracts, the Company is reliant on its customers, which include government agencies, to provide referrals, for whom the Company can provide services and earn revenue. The timing of referrals can fluctuate significantly, leading to volatility in revenue.
HA Services, reported in discontinued operations, has historically, with the exception of the year ended December 31, 2015, experienced higher volumes in the second half of the calendar year.
Liquidity and capital resources
Short-term capital requirements consist primarily of recurring operating expenses, new contract start-up costs, including workforce restructuring costs, commitments to fund investments, and debt service requirements. In order to ensure operational optimization, we periodically perform reviews of our operations and service delivery infrastructure. These reviews may result in the identification of actions or measures which are expected to have long-term benefits, but which could result in short-term capital requirements for restructuring, capital expenditures or implementation costs. Currently, we have ongoing reviews at WD Services and NET Services. We expect to meet any requirements through available cash on hand, cash generated from our operating segments, and borrowing capacity under our revolving credit facility.
Cash flow from operating activities was our primary source of cash during YTD 2016. Our balance of cash and cash equivalents was $52,362 and $79,756 at September 30, 2016 and December 31, 2015, respectively, including $26,331 and $37,467 held in foreign countries, respectively. Such cash held in foreign countries is generally used to fund foreign operations, although it may also be used to repay intercompany indebtedness existing between Providence and its foreign subsidiaries. Cash included in current assets of discontinued operations held for sale totaled $10,255 and $5,014 at September 30, 2016 and December 31, 2015, respectively.
We had restricted cash of $15,139 and $20,056 at September 30, 2016 and December 31, 2015, respectively, primarily related to contractual obligations and activities of our captive insurance subsidiary. At September 30, 2016 and December 31, 2015, our total debt was $325,200 and $304,950, respectively.
We may, from time to time, access capital markets to raise equity or debt financing for various business reasons, including required debt payments and 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 $44,981 for YTD 2016. These cash flows included net income of $7,075. Non-cash items included $24,140 of amortization expense, $17,039 of depreciation expense, $3,204 in stock-based compensation expense, and $5,693 in equity in net loss of investees. In addition, we made estimated income tax payments of $30,153 in relation to the sale of our Human Services segment. Changes in working capital items include the following significant items:
|
●
|
$31,935 source of cash due to the increase in accrued transportation costs of our NET Services segment primarily related to increased volume experienced for YTD 2016 as compared to YTD 2015.
|
|
●
|
$32,530 source of cash due to the change in accounts payable and accrued expenses that was primarily related to increased NET Services accrued contract payments, increased compensation accruals and additional incentive compensation accruals.
|
|
●
|
$22,116 use of cash due to the increase in accounts receivable. Approximately $10,240 of the increase in accounts receivable related to our NET Services segment and was primarily attributable to accounts receivable growth from increased volume. Additionally, WD Services experienced an increase in accounts receivable of $10,515 due primarily to increased incentive fee receivables under the segment’s primary employability program in the United Kingdom.
|
|
●
|
$15,577 use of cash due to the increase in prepaid expenses and other assets, the majority of which is due to cash payments made for income taxes and insurance policy renewals.
|
Investing activities.
Net cash used in investing activities totaled $35,150 for YTD 2016. During YTD 2016, $33,928 of cash was used to purchase property and equipment primarily related to information technology purchases to support service delivery efficiencies and the growth of our operating segments, and $6,381 was used to fund our equity investment in Mission Providence. These cash outflows were partially offset by a decrease in the restricted cash of our captive insurance company of $4,917.
Financing activities.
Net cash used in financing activities totaled $31,945 for YTD 2016. During YTD 2016, we borrowed $43,500 under our revolving credit facility and paid scheduled term loan payments of $23,250. During YTD 2016, cash paid for common stock repurchases pursuant to our $70,000 stock repurchase program totaled $53,096 and we paid convertible preferred stock dividends of $3,309. Additionally, on October 26, 2016, our board of directors authorized a new stock repurchase program, under which we may repurchase up to $100,000 in aggregate value of our common stock during the twelve-month period following October 26, 2016.
Effect of exchange rate changes on cash.
There was a negative effect on cash of $39 for YTD 2016 which resulted primarily from the decline in the value of the British pound, as compared to the US dollar. The June 23, 2016 announcement of the passage of the referendum advising for the exit of the United Kingdom (“UK”) from the European Union (“EU”)
adversely impacted global markets, including currencies, and resulted in a decline in the value of the British pound, as compared to the US dollar. Volatility in exchange rates is expected to continue as the UK negotiates its exit from the EU. A weaker British pound compared to the US dollar during a reporting period causes local currency results of our UK operations to be translated into fewer US dollars. In addition, certain balances which are denominated in non-functional currencies were impacted, as they are translated to British pounds.
Obligations
and commitments
The following description is as of September 30, 2016. See below for a discussion of the impact of the Fourth Amendment and Consent to the Amended and Restated Credit and Guaranty Agreement, which became effective on October 19, 2016, in conjunction with the Matrix stock subscription transaction.
Credit facility.
We are party to the amended and restated credit and guaranty agreement, dated as of August 2, 2013 (as amended, the “Credit Agreement”) with Bank of America, N.A., as administrative agent, swing line lender and letter of credit issuer, and the other lenders party thereto. The Credit Agreement provides us with senior secured credit facilities, which consisted of the following at September 30, 2016:
|
●
|
$60,000 term loan subject to quarterly amortization payments, which commenced on December 31, 2014, so that the following percentages of the term loan outstanding on the closing date are repaid as follows: 7.5% between December 31, 2014 and September 30, 2015, 10.0% between December 31, 2015 and September 30, 2016, 12.5% between December 31, 2016 and September 30, 2017, 15.0% between December 31, 2017 and June 30, 2018 and the remaining balance on August 2, 2018. At September 30, 2016, $49,500 was outstanding.
|
|
●
|
$250,000 term loan subject to quarterly amortization payments, which commenced on March 31, 2015, so that the following percentages of the term loan outstanding on the closing date are repaid as follows: 7.5% between March 31, 2015 and December 31, 2015, 10.0% between March 31, 2016 and December 31, 2016, 12.5% between March 31, 2017 and December 31, 2017, 15.0% between March 31, 2018 and June 30, 2018 and the remaining balance on August 2, 2018. At September 30, 2016, $212,500 was outstanding.
|
|
●
|
$240,000 revolving credit facility, including a subfacility of $25,000 for letters of credit. As of September 30, 2016, we had $63,200 of borrowings and seven letters of credit in the amount of $5,758 outstanding under the revolving credit facility. At September 30, 2016, our available credit under the revolving credit facility was $171,042.
|
The credit facilities mature on August 2, 2018.The outstanding amounts due under the term loans were fully repaid and the outstanding balance of the revolving credit facility was reduced to zero on October 20, 2016. See discussion below on the amendment to the Credit Agreement.
As of September 30, 2016, interest on the outstanding principal amount of the loans accrues, at our 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 2.25% to 3.25% in the case of LIBOR loans and 1.25% to 2.25% in the case of the base rate loans, in each case, based on our consolidated leverage ratio as defined in the Credit Agreement. The interest rate applied to our term loan at September 30, 2016 was 3.38%. 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 range from 0.25% to 0.50% and 2.25% to 3.25%, respectively, in each case, based on our consolidated leverage ratio.
Our obligations under the credit facilities are guaranteed by substantially all of our present and future wholly owned domestic subsidiaries, excluding certain domestic subsidiaries, which includes our insurance captives. Our obligations under, and each guarantor’s obligations under its guaranty of, the credit facilities 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, excluding our insurance captives, and 65% of the issued and outstanding stock of our first tier foreign subsidiaries.
The 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 to financial covenants, including consolidated net leverage and consolidated fixed charge covenants. We were in compliance with all covenants as of September 30, 2016.
Fourth Amendment and Consent to the Amended and Restated Credit and Guaranty Agreement
. On August 28, 2016, we entered into the Fourth Amendment and Consent to the Amended and Restated Credit and Guaranty Agreement (the “Amendment”), amending the Credit Agreement. Pursuant to the Amendment, which provided for the lenders' consent of the Matrix stock subscription transaction, the net cash proceeds received by Providence were to be applied first, to the prepayment of outstanding term loans, second, to the prepayment of outstanding revolving loans and third, for any purpose not prohibited by the Credit Agreement. In October 2016, we used $335,061 of the net proceeds received at the Closing of the Matrix stock subscription transaction to repay in full all outstanding amounts due under our term loans, reduce the outstanding balance under our revolving credit facility to zero, and pay all related accrued interest.
Additionally, effective following the repayment of the outstanding term loans in full, which was completed on October 20, 2016, the Amendment further (i) reduced the aggregate revolving commitments under the Credit Agreement to $200,000, (ii) amended the consolidated net leverage ratio covenant such that our consolidated net leverage ratio may not be greater than 3.00:1.00 as of the end of any fiscal quarter, and (iii) replaced the existing consolidated fixed charge coverage ratio covenant with a covenant that our consolidated interest coverage ratio may not be less than 3.00:1.00 as of the end of any fiscal quarter. As of October 20, 2016, the remaining equity interest in Matrix is no longer pledged as collateral under the Credit Agreement.
Rights offering.
We completed a Rights Offering, on February 5, 2015 (the “Rights Offering”) allowing all of the Company’s existing common stock holders the non-transferrable right to purchase their pro rata share of $65,500 of convertible preferred stock at a price equal to $100.00 per share. The convertible preferred stock is convertible into shares of our common stock at a conversion price equal to $39.88, which was the closing price of our common stock on the NASDAQ Global Select Market on October 22, 2014.
Stockholders exercised subscription rights to purchase 130,884 shares of the Company's convertible preferred stock. Pursuant to the terms and conditions of the Standby Purchase Agreement between Coliseum Capital Partners, L.P., Coliseum Capital Partners II, L.P., Coliseum Capital Co-Invest, L.P. and Blackwell Partners, LLC (collectively, the "Standby Purchasers") and the Company, the remaining 524,116 shares of the Company's preferred stock were purchased by Standby Purchasers at the $100.00 per share subscription price. The Standby Purchasers beneficially owned approximately 94% of our outstanding convertible preferred stock after giving effect to the Rights Offering and the Standby Purchase Agreement. The Company received $65,500 in aggregate gross proceeds from the consummation of the Rights Offering and Standby Purchase Agreement, which it used to repay the related party unsecured subordinated bridge note that was outstanding as of December 31, 2014.
Additionally, on March 12, 2015, the Standby Purchasers exercised their right to purchase an additional 150,000 shares of the Company’s convertible preferred stock at a $105.00 per share subscription price.
We may pay a noncumulative cash dividend on each share of convertible preferred stock, when, as and if declared by our Board of Directors, at the rate of five and one-half percent (5.5%) per annum on the liquidation preference then in effect. Following the issue date of the convertible preferred stock, on or before the third business day immediately preceding each fiscal quarter, we will determine our intention whether or not to pay a cash dividend with respect to that ensuing quarter and will give notice of our intention to each holder of convertible preferred stock as soon as practicable thereafter.
In the event we do not declare and pay a cash dividend, the liquidation preference will be increased to an amount equal to the liquidation preference in effect at the start of the applicable dividend period, plus an amount equal to such then applicable liquidation preference multiplied by eight and one-half percent (8.5%) per annum, computed on the basis of a 365-day year and the actual number of days elapsed from the start of the applicable dividend period to the applicable date of determination.
Cash dividends are payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year and commenced on the first calendar day of the first January, April, July or October following the date of original issuance of the convertible preferred stock, and, if declared, will begin to accrue on the first day of the applicable dividend period. Paid in kind (“PIK”) dividends, if applicable, will accrue and be cumulative on the same schedule as set forth above for cash dividends and will also be compounded at the applicable annual rate on each applicable subsequent dividend date. PIK dividends are paid upon the occurrence of a liquidation event, conversion or redemption in accordance with the terms of the convertible preferred stock. Cash dividends were declared for the nine months ended September 30, 2016 and totaled $3,309.
Contingent obligations.
We maintain a 409(A) Deferred Compensation Rabbi Trust Plan for highly compensated employees of our NET Services operating segment. Benefits are paid from our general assets under 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 (“SPCIC”). At September 30, 2016, the cumulative reserve for expected losses since inception of these automobile, general and professional liability and workers’ compensation costs reinsurance programs was $2,005, $1,438 and $9,876, respectively. In addition, based on a third-party 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, 2016 was $6,237. Further, SPCIC had restricted cash of $14,758 and $19,491 at September 30, 2016 and December 31, 2015, respectively, which was restricted to secure the reinsured claims losses of SPCIC under the automobile, general and professional liability and workers’ compensation reinsurance programs.
Health Insurance
We offer our NET Services’, HA Services’, certain WD Services’ and corporate employees an option to participate in a self-funded health insurance program. The liability for the self-funded health plan of $1,975 and $1,606 as of September 30, 2016 and December 31, 2015, respectively, was recorded in “Reinsurance liability and related reserve” in our condensed consolidated balance sheets.
Off-Balance Sheet Arrangements
There have been no material changes to the Off-Balance Sheet Arrangements discussion previously disclosed in our audited consolidated financial statements contained
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q, such as any statements about our confidence, strategies or expectations about revenues, liabilities, results of operations, cash flows, ability to fund operations, profitability, ability to meet financial covenants, contracts or market opportunities, constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and section 21E of the Securities Exchange Act of 1934, as amended (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, 2015, under Part II, Item 1A, Risk Factors, in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2016 and under Part II, Item 1A,
Risk Factors
,
in this Quarterly Report on Form 10-Q. 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, except as otherwise required by law.