Notes to Consolidated Financial Statements
December 31, 2016
(in thousands except share and per share data)
1. Organization and Basis of Presentation
Description of Business
The Providence Service Corporation (“we”, the “Company” or “Providence”) is a holding company, which owns interests in subsidiaries and other companies that are primarily engaged in the provision of healthcare and workforce development services for public and private sector entities seeking to control costs and promote positive outcomes. The subsidiaries and other companies in which the Company holds interests comprise the following segments:
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Non-Emergency Transportation Services (“NET Services”) – Nationwide provider of non-emergency medical transportation programs for state governments and managed care organizations.
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Workforce Development Services (“WD Services”) – Global provider of employment preparation and placement and legal offender rehabilitation services to eligible participants of government sponsored programs.
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Matrix Investment – Minority interest in nationwide provider of in-home care optimization and management solutions, including comprehensive health assessments (“CHAs”), to members of managed care organizations, accounted for as an equity method investment.
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Ingeus UK Holdings Limited and its wholly and partly-owned subsidiaries and associates (collectively, “Ingeus”), which make up the majority of WD Services, were acquired on May 30, 2014. On November 1, 2015, the Company completed the sale of its Human Services segment, which is accounted for as a discontinued operation.
Matrix Investment is comprised of Mercury Parent, LLC, a newly formed parent of CCHN Group Holdings, Inc. CCHN Group Holdings, Inc. and its subsidiaries are referred to as “Matrix”. Matrix was acquired by the Company on October 23, 2014. On October 19, 2016, affiliates of Frazier Healthcare Partners purchased a 53.2% equity interest in Matrix with Providence retaining a 46.8% equity interest (the “Matrix Transaction”). Prior to the closing of the Matrix Transaction, the financial results of Matrix were included in the Company’s Health Assessment Services (“HA Services”) segment. The Company now owns a noncontrolling interest in Matrix. The Company’s proportionate share of Matrix’s net assets and financial results for the period following the closing of the Matrix Transaction are presented under the equity method. Its assets, liabilities and financial results for the period prior to the closing of the Matrix Transaction are presented within discontinued operations. For additional information regarding the Matrix Transaction, see Note 21,
Discontinued Operations
.
As of December 31, 2016, the Company’s consolidated subsidiaries operated in 40 states and the District of Columbia in the United States (“U.S.”), and in 9 countries outside of the U.S.
Basis of Presentation
The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”). The FASB establishes accounting principles generally accepted in the United States (“GAAP”). Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. References to GAAP issued by the FASB in these footnotes are to the FASB
Accounting Standards Codification
(“ASC”), which serves as a single source of authoritative non-SEC accounting and reporting standards to be applied by non-governmental entities. All amounts are presented in U.S. dollars, unless otherwise noted.
The Company holds investments that are accounted for using the equity method. The Company does not control the decision making process nor business management practices of these affiliates. Accordingly, the Company relies on management of these affiliates to provide accurate financial information prepared in accordance with GAAP. The Company receives audit reports relating to such financial information from the affiliates’ independent auditors on an annual basis. The Company is not aware of any errors in or possible misstatements of the financial information provided by its equity affiliates that would have a material effect on the Company’s consolidated financial statements.
Reclassifications
The Company has reclassified certain amounts relating to its prior period results to conform to its current period presentation. Effective January 1, 2016, the Company adopted Accounting Standards Update (“ASU”) No. 2015-03,
Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs
(“ASU 2015-03”) and reclassified debt issuance costs to a contra-liability account in the consolidated balance sheet as of December 31, 2015.
During the quarter ended September 30, 2016, Matrix, which comprised the HA Services segment, met the criteria for held for sale classification due to the execution on August 28, 2016 of a stock subscription agreement by the Company pursuant to which a third-party subscribed for a controlling equity interest in Matrix. The transaction was effective October 19, 2016 and resulted in a gain, net of tax, of $109,403. The HA Services segment is presented as a discontinued operation in accordance with GAAP. The assets and liabilities of the HA Services segment are classified as held for sale in the consolidated balance sheet for the year ended December 31, 2015. Additionally, the operating results of this segment, along with the Human Services segment sold on November 1, 2015, are reported as discontinued operations, net of tax, in the consolidated statements of income for all periods presented. See Note 21,
Discontinued Operations.
2. Significant Accounting Policies and Recent Accounting Pronouncements
Principles of Consolidation
The accompanying consolidated financial statements include The Providence Service Corporation, its wholly-owned subsidiaries, and entities it controls, or in which it has a variable interest and is the primary beneficiary of expected cash profits or losses. The Company records its investments in entities that it does not control, but over which it has the ability to exercise significant influence, using the equity method. The Company has eliminated significant intercompany transactions and accounts.
Accounting Estimates
The Company uses estimates and assumptions in the preparation of the consolidated financial statements in accordance with GAAP. Those estimates and assumptions affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the Company’s consolidated financial statements. These estimates and assumptions also affect the reported amount of net income or loss during any period. The Company’s actual financial results could differ significantly from these estimates. The significant estimates underlying the Company’s consolidated financial statements include revenue recognition; allowance for doubtful accounts; accrued transportation costs; accrued restructuring; income taxes; recoverability of current and long-lived assets, including equity method investments; intangible assets and goodwill; loss contingencies; accounting for business combinations, including amounts assigned to definite and indefinite lived intangibles and contingent consideration; loss reserves for reinsurance and self-funded insurance programs; and stock-based compensation.
Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid investments with an initial maturity of three months or less. Investments in cash equivalents are carried at cost, which approximates fair value. The Company places its temporary cash investments with high credit quality financial institutions. At times, such investments may be in excess of the federally insured limits.
At December 31, 2016 and 2015, $21,411 and $37,467, respectively, of cash was held in foreign countries. Such cash is generally used to fund foreign operations, although it may be used also to repay intercompany indebtedness or similar arrangements.
Restricted Cash
At December 31, 2016 and 2015, the Company had $14,130 and $20,056, respectively, of restricted cash:
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December 31,
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2016
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2015
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Collateral for letters of credit - Reinsured claims losses
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$
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2,265
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$
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3,033
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Escrow/Trust - Reinsured claims losses
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11,865
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17,023
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Restricted cash for reinsured claims losses
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14,130
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20,056
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Less current portion
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3,192
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4,012
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Restricted cash, less current portion
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$
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10,938
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$
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16,044
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Of the restricted cash amount at December 31, 2016 and 2015:
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$2,265 and $3,033, respectively, served as collateral for irrevocable standby letters of credit to secure any reinsured claims losses under the Company’s reinsurance program;
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of the remaining $11,865 and $17,023:
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$310 and $565, respectively, was restricted under a historical auto liability program associated with NET Services that ceased providing reinsurance on new claims in 2011; and
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$11,555 and $16,458, respectively, was restricted and held in trusts for reinsurance claims losses under the Company’s workers’ compensation, general and professional liability and auto liability reinsurance programs.
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Accounts Receivable and Allowance for Doubtful Accounts
The Company records accounts receivable amounts at the contractual amount, less an allowance for doubtful accounts. The Company maintains an allowance for doubtful accounts at an amount it estimates to be sufficient to cover the risk that an account will not be collected. The Company regularly evaluates its accounts receivable, especially receivables that are past due, and reassesses its allowance for doubtful accounts based on identified customer collection issues. In circumstances where the Company is aware of a customer’s inability to meet its financial obligation, the Company records a specific allowance for doubtful accounts to reduce its net recognized receivable to an amount the Company reasonably expects to collect. The Company also provides a general allowance, based upon historical experience. Under certain contracts of NET Services, final payment is based on a reconciliation of actual utilization and cost, and the final reconciliation may require a considerable period of time. As of December 31, 2016 and 2015, accounts receivable under these reconciliation contracts totaled $45,287 and $30,242, respectively.
The Company’s provision for doubtful accounts expense for the years ended December 31, 2016, 2015 and 2014 was $2,892, $1,369 and $1,014, respectively.
Property and Equipment
Property and equipment are stated at historical cost, net of accumulated depreciation, or at fair value if the assets were initially recorded as the result of a business combination or if the asset was remeasured due to an impairment. Depreciation is calculated using the straight-line method over the estimated useful life of the asset. Maintenance and repairs are expensed as incurred. Gains and losses resulting from the disposition of an asset are reflected in operating expense.
Recoverability of Goodwill
In accordance with ASC 350,
Intangibles-Goodwill and Other
, the Company
reviews goodwill for impairment annually, or more frequently, if events and circumstances indicate that an asset may be impaired. Such circumstances could include, but are not limited to: (1) the loss or modification of significant contracts, (2) a significant adverse change in legal factors or in business climate, (3) unanticipated competition, (4) an adverse action or assessment by a regulator, or (5) a significant decline in the Company’s stock price.
Historically, the Company has performed the annual goodwill impairment test for all reporting units as of December 31 of each year; however, it elected to
change
this date to October 1 of each year beginning in 2016 in order to better align the timing of the annual impairment testing with the Company’s annual budgeting and forecasting process. The Company believes that this
change
in the
goodwill impairment testing date
is not a material
change
to the Company’s method of applying an accounting principle.
The Company’s evaluation of goodwill for impairment involves a two-step process to identify goodwill impairment and measure the amount of goodwill impairment loss. First, the Company performs a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment suggests that it is more likely than not that the fair value of a reporting unit is less than its carrying value, the Company then performs a quantitative assessment and compares the fair value of the reporting unit, as determined by that quantitative assessment, to its carrying value. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is considered to be potentially impaired and the Company proceeds to step two of the impairment analysis. In step two of the analysis, the Company determines the amount of any impairment loss by comparing the carrying value of the reporting unit’s goodwill to its implied fair value. Periodically, the Company may choose to forgo the initial qualitative assessment and perform only the quantitative analysis in its annual evaluation.
The Company estimates the fair value of the Company’s reporting units using either an income approach, a market valuation approach, a transaction valuation approach or a blended approach. The income approach produces an estimated fair value of a reporting unit based on the present value of the cash flows the Company expects the reporting unit to generate in the future. Estimates included in the discounted cash flow model include the discount rate, which the Company determines based on adjusting an industry-wide weighted-average cost of capital for size, geography, and company specific risk factors, long-term rates of growth and profitability of the Company’s business, working capital effects and planned capital expenditures. The market approach produces an estimated fair value of a reporting unit based on a comparison of the reporting unit to comparable publicly traded entities in similar lines of business. The transaction valuation approach produces an estimated fair value of a reporting unit based on a comparison of the reporting unit to publicly available transactional data involving both publicly traded and private entities in similar lines of business. The Company’s significant estimates in both the market and transaction approach include the selected similar companies with comparable business factors such as size, growth, profitability, risk and return on investment and the multiples the Company applies to revenue and earnings before interest, taxes, depreciation and amortization (“EBITDA”) to estimate the fair value of the reporting unit.
As discussed in Note 6,
Goodwill and Intangibles
, the Company determined that goodwill was impaired for the WD Services segment during the year ended December 31, 2016, and the Company recorded an asset impairment charge related to its goodwill of $5,224. The Company did not record any impairment charges for continuing operations for the years ended December 31, 2015 and 2014.
Recoverability of
Intangible Assets Subject to Amortization and Other Long-Lived Assets
Intangible assets subject to amortization and other long-lived assets are carried at cost and are amortized or depreciated on a straight-line basis over their estimated useful lives of 5 to 15 years. In accordance with ASC 360,
Property, Plant, and Equipment
,
the Company reviews the carrying value of long-lived assets or groups of assets to be used in operations whenever events or changes in circumstances indicate that the carrying amount of the assets may be impaired. Factors that may necessitate an impairment assessment include, among others, significant adverse changes in the extent or manner in which an asset or group of assets is used, significant adverse changes in legal factors or the business climate that could affect the value of an asset or group of assets or significant declines in the observable market value of an asset or group of assets. The presence or occurrence of those events indicates that an asset or group of assets may be impaired. In those cases, the Company assesses the recoverability of an asset or group of assets by determining whether the carrying value of the asset or group of assets exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the asset or the primary asset in the group of assets. If such testing indicates the carrying value of the asset or group of assets is not recoverable, the Company estimates the fair value of the asset or group of assets using appropriate valuation methodologies, which would typically include an estimate of discounted cash flows. If the fair value of those assets or groups of assets is less than carrying value, the Company records an impairment loss equal to the excess of the carrying value over the estimated fair value. As discussed in Note 6,
Goodwill and Intangibles
, the Company determined that the WD Services segment’s intangible assets and property and equipment were impaired during the year ended December 31, 2016, and the Company recorded asset impairment charges of $9,983 and $4,381 to property and equipment and customer relationship intangible assets, respectively.
Accrued Transportation Costs
NET Services contracts with third-party providers for transportation services. Eligible members of our customers schedule transportation through the Company’s central reservation system. The cost of transportation is recorded in the month the services are rendered, based upon contractual rates and mileage estimates. Transportation providers provide invoices once the trip is completed. Any trips that have not been invoiced require an accrual, based upon the expected cost as well as an estimate for cancellations, as the Company is generally only obligated to pay the transportation provider for completed trips. These estimates are based upon the historical trend associated with each contract’s population and the transportation provider network servicing the program. There may be differences between actual invoiced amounts and estimated costs, and any resulting adjustments are included in expense. Accrued transportation costs were $73,191 and $64,537 at December 31, 2016 and 2015, respectively.
Deferred Financing Costs and Debt Discounts
The Company capitalizes direct expenses incurred in connection with its credit facilities and other borrowings, and amortizes such expenses over the life of the respective credit facility or other borrowings. Fees charged by lenders on the revolving facility and all fees charged by third parties are recorded as deferred financing costs and fees charged by lenders on term loans are recorded as a debt discount. Deferred financing costs, net of amortization, totaling $1,070 as of December 31, 2016 is included in “Other assets”, in the consolidated balance sheet as there were no borrowings outstanding under the Company’s senior secured credit facility (“
Credit Facility”). Deferred financing costs and debt discount, net of amortization totaling $4,879 at December 31, 2015, is included in “Long-term obligations, less current portion,” in the consolidated balance sheet.
Revenue Recognition
The Company recognizes revenue when it is earned and realizable based on the following criteria: persuasive evidence that an arrangement exists, services have been rendered, the price is fixed or determinable and collectability is reasonably assured.
NET Services
Capitat
ed
contracts.
The majority of NET Services revenue is generated under capitated contracts with customers where the Company assumes the responsibility of meeting the covered transportation requirements of a specific geographic population based on per-member per-month fees for the number of members in the customer’s program. Revenue is recognized based on the population served during the period. In some capitated contracts, partial payment is received as a prepayment during the month service is provided. These partial payments may be due back to the customer, or additional payments may be due to the Company, after the contract month, based on a reconciliation of actual utilization and cost compared to the prepayment made.
Fee for service contracts.
Revenues earned under fee for service (“FFS”) contracts are based upon contractually established billing rates. Revenues are recognized when the service is provided based upon contractual amounts.
Flat fee contracts.
Revenues earned under flat fee contracts are recognized ratably over the covered service period based upon contractually established fees which do not fluctuate with any changes in the membership population who are eligible to receive the transportation services.
For most contracts, the Company arranges for transportation of members through its network of independent transportation providers, whereby it remits payment to the transportation providers. However, for certain contracts, the Company only provides management services, and does not contract with transportation providers for the actual transportation. Under these contracts, the amount of revenue recognized is based upon the management fee earned.
WD
Services
WD Services revenues are primarily generated from providing workforce development and offender rehabilitation services, both of which include employment preparation and placement, apprenticeship and training, youth community service programs and certain health related services to clients on behalf of governmental and private entities. While the specific terms vary by contract and country, the Company often receives four types of revenue streams under contracts with government entities: referral/attachment fees, job placement/job outcome fees, sustainment fees and incentive fees. Referral/attachment fees are typically upfront payments that are payable when a client is referred by the contracting government entity or that client enters the program. Job placement fees are typically payable when a client is employed. Job outcome fees are typically payable when a client is employed, and remains employed for a specified period of time. Sustainment fees are typically payable upon certain employment tenure milestones. Incentive fees are generally based upon a calculation that includes a variety of factors and inputs, such as average sustainment rates and client referral rates. Incentive fees vary greatly by contract.
Referral/attachment fee revenue is recognized ratably over the period of service, based upon an estimated period of time general services will be provided (i.e. the person is placed in a job or reaches the maximum time period for the program). The estimated period of time services will be rendered is based upon historical data. Job placement, job outcome and sustainment fee revenue is recognized when certain milestones are achieved, and amounts become billable. Incentive fee revenue is generally recognized when fixed and determinable, frequently at the end of the cumulative calculation period, unless contractual terms allow for earned payments on a fixed or ratable basis.
Revenue is also earned under fixed FFS arrangements, based upon contractual rates established at the outset of the contract or the applicable contract year, although the rate may be prospectively adjusted during the contract year based upon actual volumes. If the rate is adjusted but the Company is unable to adjust its costs accordingly, our profitability may be negatively impacted. Volume levels are typically not guaranteed under contracts.
Deferred Revenue
At times we may receive funding for certain services in advance of services being rendered. These amounts are reflected in the consolidated balance sheets as “Deferred revenue” until the services are rendered.
Stock-Based Compensation
The Company follows the fair value recognition provisions of ASC Topic 718 –
Compensation – Stock Compensation
(“ASC 718”), which requires companies to measure and recognize compensation expense for all share based payments at fair value.
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The Company calculates the fair value of stock options using the Black-Scholes option-pricing formula. The fair value of non-vested restricted stock grants is determined based on the closing market price of the Company’s common stock on the date of grant. Stock-based compensation expense charged against income for stock options and stock grants is based on the grant-date fair value, based upon the number of awards expected to vest. Forfeitures estimated at the time of grant are revised as necessary based upon actual vesting. The expense for stock-based compensation awards is amortized on a straight-line basis over the requisite service period, which is typically the vesting period.
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The Company records restricted stock units (“RSUs”) that may be settled by the holder in cash, rather than shares, as a liability and remeasures these liabilities at fair value at the end of each reporting period. Upon settlement of these awards, the total compensation expense recorded over the vesting period of the awards will equal the settlement amount, which is based on the Company’s stock price on the settlement date.
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Performance-based RSUs vest upon achievement of certain company specific performance conditions. On the date of grant, the Company determines the fair value of the performance-based award using the fair value of the Company’s common stock at that time and it assesses whether it is probable that the performance targets will be achieved. If assessed as probable, the Company records compensation expense for these awards over the requisite service period. At each reporting period, the Company reassesses the probability of achieving the performance targets and the performance period required to meet those targets. The estimation of whether the performance targets will be achieved and of the performance period required to achieve the targets requires judgment, and to the extent actual results or updated estimates differ from the Company’s current estimates, the cumulative effect on current and prior periods of those changes will be recorded in the period estimates are revised, or the change in estimate will be applied prospectively depending on whether the change affects the estimate of total compensation cost to be recognized or merely affects the period over which compensation cost is to be recognized. The ultimate number of shares issued and the related compensation expense recognized will be based on a comparison of the final performance metrics to the specified targets.
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The Company calculates the fair value of market-based stock awards, including the Company’s the 2015 Holding Company LTI Program (the “HoldCo LTIP”) awards, using the Monte-Carlo simulation valuation model. Forfeitures estimated at the time of grant are revised as necessary based upon actual vesting. Compensation expense for market-based awards is recognized over the requisite service period regardless of whether the market conditions are expected to be achieved.
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Income Taxes
Deferred income taxes are determined by the liability method in accordance with ASC Topic 740 -
Income
Taxes
. Under this method, deferred tax assets and liabilities are determined based on differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and are measured using the enacted tax rates and laws that are expected to be in effect when the differences are expected to reverse. The Company considers many factors when assessing the likelihood of future realization of deferred tax assets, including recent earnings experience by jurisdiction, expectations of future taxable income, and the carryforward periods available for tax reporting purposes, as well as other relevant factors. The Company establishes a valuation allowance to reduce deferred tax assets to the amount that is more likely than not to be realized. Due to inherent complexities arising from the nature of the Company’s businesses, future changes in income tax law or variances between the Company’s actual and anticipated operating results, the Company makes certain judgments and estimates. Therefore, actual income taxes could materially vary from these estimates.
The Company has recorded a valuation allowance which includes amounts for net operating losses and tax credit carryforwards, as more fully described in Note 18,
Income Taxes,
for which the Company has concluded that it is more likely than not that these net operating loss and tax credit carryforwards will not be realized in the ordinary course of operations.
The Company recognizes interest and penalties related to income taxes as a component of income tax expense.
Residual U.S. income taxes have not been provided on undistributed earnings of the Company’s foreign subsidiaries. These earnings are considered to be indefinitely reinvested and, accordingly, no provision for U.S. federal and state income taxes will be provided thereon. Upon distribution of those earnings in the form of dividends or otherwise, the Company may be subject to both U.S. income taxes and withholding taxes payable to various foreign jurisdictions, less an adjustment for foreign tax credits. Funds utilized to repay intercompany amounts are not subject to withholding requirements. Because of the availability of U.S. foreign tax credits, it is not practicable to determine the U.S. federal income tax liability that would be payable if such earnings were not reinvested indefinitely.
The Company accounts for uncertain tax positions based on a two-step process of evaluating recognition and measurement criteria. The first step assesses whether the tax position is more likely than not to be sustained upon examination by the tax authority, including resolution of any appeals or litigation, based on the technical merits of the position. If the tax position meets the more likely than not criteria, the portion of the tax benefit greater than 50% likely to be realized upon settlement with the tax authority is recognized in the consolidated financial statements.
Foreign Currency Translation
Local currencies generally are considered the functional currencies outside the US. Assets and liabilities for operations in local-currency environments are translated at month-end exchange rates of the period reported. Income and expense items are translated at the average exchange rate for each applicable month. Cumulative translation adjustments are recorded as a component of accumulated other comprehensive loss, net of tax, in stockholders’ equity within the consolidated balance sheets.
Loss Reserves for Certain Reinsurance and Self-Funded Insurance Programs
The Company reinsures a substantial portion of its automobile, general and professional liability and workers’ compensation costs under reinsurance programs through the Company’s wholly-owned subsidiary, Social Services Providers Captive Insurance Company (“SPCIC”), a licensed captive insurance company domiciled in the State of Arizona.
The Company and its subsidiaries enter into insurance arrangements with third-party insurers. SPCIC reinsures third-party insurers for automobile liability exposures for $250 per claim. SPCIC also reinsures these third-party insurers for general and professional liability exposures for the first dollar of each loss up to $1,000 per loss and $3,000 in the aggregate. Additionally, SPCIC reinsures a third-party insurer for worker’s compensation insurance for the first dollar of each and every loss up to $500 per occurrence. The Company utilizes a report prepared by an independent actuary to estimate the gross expected losses related to automobile, general and professional and workers’ compensation liability, including the estimated losses in excess of SPCIC’s insurance limits, which would be reimbursed to SPCIC to the extent such losses were incurred. As of December 31, 2016 and 2015, the Company had reserves of $11,195 and $12,988, respectively, for the automobile, general and professional liability and workers’ compensation programs, net of expected receivables for losses in excess of SPCIC’s insurance limits. The gross reserve as of December 31, 2016 and 2015 of $16,460 and $19,733, respectively, is classified as “Reinsurance liability reserves” and “Other long-term liabilities” in the consolidated balance sheets. The estimated amount to be reimbursed to SPCIC as of December 31, 2016 and 2015 was $5,265 and $6,745, respectively, and is classified as “Other receivables’ and “Other assets” in the consolidated balance sheets.
The Company also maintains a self-funded health insurance program with a stop-loss umbrella policy with a third-party insurer to limit the maximum potential liability for individual claims to $275 per person, subject to an aggregating stop-loss limit of $400. In addition, the program has a total stop-loss limit for total claims, in order to limit the Company’s exposure to catastrophic claims. With respect to this program, the Company considers historical and projected medical utilization data when estimating its health insurance program liability and related expense. As of December 31, 2016 and 2015, the Company had $3,022 and $2,351, respectively, in reserve for its self-funded health insurance programs. The reserves are classified as “Reinsurance and related liability reserves” in the consolidated balance sheets.
The Company utilizes analyses prepared by third-party administrators and independent actuaries based on historical claims information with respect to the general and professional liability coverage, workers’ compensation coverage, automobile liability, automobile physical damage, and health insurance coverage to determine the amount of required reserves.
The Company regularly analyzes its reserves for incurred but not reported claims, and for reported but not paid claims related to its reinsurance and self-funded insurance programs. The Company believes its reserves are adequate. However, significant judgment is involved in assessing these reserves such as assessing historical paid claims, average lags between the claims’ incurred date, reported dates and paid dates, and the frequency and severity of claims. There may be differences between actual settlement amounts and recorded reserves and any resulting adjustments are included in expense once a probable amount is known.
Restructuring
, Redundancy
and Related Reorganization Costs
The Company has engaged in employee headcount optimization actions within the WD Services segment which require management to estimate the timing and amount of severance and other employee separation costs for workforce reduction. The Company accrues for severance and other employee separation costs under these actions when it is probable that benefits will be paid and the amount is reasonably estimable. The amounts used in determining severance accruals are based on an estimate of the salaries and related benefit costs payable under existing plans, and are included in accrued expenses to the extent they have not been paid.
Noncontrolling Interests
Noncontrolling interests represent the noncontrolling holders’ percentage share of income or losses from a subsidiary in which the Company holds a majority, but less than 100%, ownership interest and the results of which are consolidated and included in the Company’s consolidated financial statements. The Company has a 90% ownership in The Reducing Reoffending Partnership Limited, which commenced operations in 2015.
Discontinued Operations
In determining whether a group of assets disposed (or to be disposed) of should be presented as a discontinued operation, the Company makes a determination of whether the criteria for held-for-sale classification is met and whether the disposition represents a strategic shift that has (or will have) a major effect on the entity’s operations and financial results. If these determinations can be made affirmatively, the results of operations of the group of assets being disposed of (as well as any gain or loss on the disposal transaction) are aggregated for separate presentation apart from continuing operating results of the Company in the consolidated financial statements. See Note 21,
Discontinued Operations,
for a summary of discontinued operations.
Earnings Per Share
The Company computes basic earnings per share by taking net income attributable to the Company available to common stockholders divided by the weighted average number of common shares outstanding during the period including restricted stock and stock held in escrow if such shares are participating securities. Diluted earnings per share includes the potential dilution that may occur from stock-based awards and other stock-based commitments using the treasury stock or the as-if converted methods, as applicable. For additional information on how the Company computes earnings per share, see Note 15,
Earnings Per Share
.
Fair Value of Financial Instruments
The Company discloses the fair value of its financial instruments based on the fair value hierarchy using the following three categories:
Level 1 – Quoted prices in active markets for identical assets or liabilities that are accessible at the measurement date.
Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.
The Company may be required to pay additional consideration in relation to certain acquisitions based on the achievement of certain earnings targets. Acquisition-related contingent consideration is initially measured and recorded at fair value as an element of consideration paid in connection with an acquisition with subsequent adjustments recognized in “General and administrative expense” in the consolidated statements of income. The Company determines the fair value of acquisition-related contingent consideration, and any subsequent changes in fair value using a discounted probability-weighted approach. This approach takes into consideration Level 3 unobservable inputs including probability assessments of expected future cash flows over the period in which the obligation is expected to be settled and applies a discount factor that captures the uncertainties associated with the obligation. Changes in these unobservable inputs could significantly impact the fair value of the obligation recorded in the accompanying consolidated balance sheets and operating expenses in the consolidated statements of income.
The carrying amounts of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximate their fair value because of the relatively short-term maturity of these instruments.
Recent Accounting Pronouncements
The Company adopted the following accounting pronouncements during the year ended December 31, 2016:
In April 2015, the FASB issued ASU 2015-03, which requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The Company capitalizes debt issuance costs incurred in connection with its credit facilities, line-of-credit, and other borrowings (“deferred financing costs”), and amortizes such costs over the life of the respective debt liability.
Upon adoption of ASU 2015-03 on January 1, 2016, the Company elected to present deferred financing costs for both its credit facilities and line-of credit arrangement as a direct deduction from the carrying amount of the respective debt liability. Accordingly, deferred financing costs, net of amortization, totaling $3,774 at December 31, 2015 have been reclassified from “Other assets” to “Long-term obligations, less current portion” in the consolidated balance sheet.
In February 2015, the FASB issued ASU No. 2015-02,
Consolidation (Topic 810): Amendments to the Consolidation Analysis
(“ASU 2015-02”)
,
which changes the way reporting enterprises evaluate whether (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a decision maker or service provider are variable interests in a variable interest entity (“VIE”), and (c) variable interests in a VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE. The new consolidation guidance is effective for public business entities for annual and interim periods in fiscal years beginning after December 15, 2015. The adoption of ASU 2015-02 on January 1, 2016 had no impact on the consolidation of the Company’s existing VIEs.
In September 2015, the FASB issued ASU 2015-16,
Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments
(“ASU 2015-16”) which eliminates the requirement for an acquirer to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is consummated. The ASU is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2015. The Company adopted ASU 2015-16 on January 1, 2016. The adoption of this ASU did not have an impact on the Company’s current accounting and disclosures; however, any future business acquisition transactions may be impacted.
Recent accounting pronouncements that were not yet adopted by the Company through December 31, 2016 are as follows:
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers: Topic 606
(“ASU 2014-09”). ASU 2014-09 introduced FASB Accounting Standards Codification Topic 606 (“ASC 606”). ASC 606 will supersede ASC 605,
Revenue Recognition
and most of the industry-specific guidance on recognizing revenue. The FASB has since issued the following updates that clarify or supplement the guidance in ASU 2014-09:
|
●
|
In December 2016, the FASB issued ASU No. 2016-20,
Revenue from Contracts with Customers (Topic 606): Technical Corrections and Improvements
(“ASU 2016-20”). ASU 2016-20 makes several narrow-scope improvements or clarifications to ASC 606. Most notably, ASU 2016-20 provides additional guidance on testing contract costs for impairment, applying the guidance on contract modifications, and determining the point at which a contract asset becomes a receivable. Additionally, ASU 2016-20 clarifies the information an entity should include in the disclosure of remaining performance obligations and provides an optional exemption from those disclosure requirements in situations in which an entity is not required to estimate variable consideration to recognize revenue.
|
|
●
|
In May 2016, the FASB issued ASU No. 2016-12,
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
(“ASU 2016-12”). ASU 2016-12 clarifies how an entity should assess collectability, present sales taxes, measure noncash consideration and apply some aspects of the transition guidance in ASU 2014-09.
|
|
●
|
In April 2016, the FASB issued ASU No. 2016-10,
Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing
(“ASU 2016-10”). ASU 2016-10 clarifies the guidance in ASU 2014-09 for identifying performance obligations and recognizing revenue for licenses of intellectual property.
|
|
●
|
In March 2016, the FASB issued ASU No. 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)
(“ASU 2016-08”)
.
ASU 2016-08 clarifies the implementation guidance in ASU 2014-09 on principal versus agent considerations and whether an entity should report revenue on a gross or net basis.
|
Each of these ASUs are effective for public companies for annual reporting periods (and interim reporting periods within those annual reporting periods) beginning after December 15, 2017 and permit entities to transition using either a full retrospective or modified retrospective methodology. The Company has developed an implementation plan, assembled a cross-functional project team and begun to assess the impacts of applying ASC 606 by completing an analysis of the Company’s contracts with its customers. Based upon these preliminary procedures, management anticipates that the following key considerations will impact the Company's accounting and reporting under the new standard:
|
●
|
identification of what constitutes a contract in the Company’s environment,
|
|
●
|
timing of revenue recognition (for example, point-in-time versus over time and/or accelerated versus deferred),
|
|
●
|
single versus multiple performance obligations, and
|
The assessment of applying ASC 606 is ongoing and, therefore, the Company has not yet determined whether those impacts will be material to the Company’s consolidated financial statements.
In November 2015, the FASB issued ASU 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
(“ASU 2015-17”) which changes how deferred taxes are classified on organizations’ balance sheets. The ASU eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The amendments apply to all organizations that present a classified balance sheet. For public companies, the amendments are effective for financial statements issued for annual periods beginning after December 16, 2016, and interim periods within those annual periods. The Company adopted ASU 2015-17 on January 1, 2017. This ASU impacts the Company’s financial statements, as the Company had $6,825
of current deferred tax assets, at December 31, 2016. Application of this guidance as of December 31, 2016 would have resulted in a long-term deferred tax asset of $1,510 and a long-term deferred tax liability of $57,973 in the consolidated balance sheet as of December 31, 2016.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
(“ASU 2016-02”). ASU 2016-02 introduced FASB Accounting Standards Codification Topic 842 (“ASC 842”), which will replace ASC 840,
Leases
. Under ASC 842, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.
ASU 2016-02 is effective for publicly held entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach does not require transition accounting for leases that expired before the earliest comparative period presented. Lessees may not apply a full retrospective transition approach. The Company has not entered into significant lease agreements in which it is the lessor; however, the Company does have lease agreements in which it is the lessee. The Company is in the preliminary stages of assessing the impact of applying ASC 842 to its lease agreements. The assessment of applying ASU 2016-02 is ongoing and, therefore, the Company has not yet determined whether the impacts will be material to the Company’s consolidated financial statements.
In March 2016, the FASB issued ASU No. 2016-07,
Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting
(“ASU 2016-07”). ASU 2016-07 eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. ASU 2016-07 instead specifies that the investor should add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and apply the equity method of accounting as of the date the investment became qualified for equity method accounting. ASU 2016-07 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 and should be applied prospectively. The Company adopted ASU 2016-07 on January 1, 2017. The adoption of ASU 2016-07 will impact the Company’s accounting and disclosures for investments for which it begins applying the equity method after January 1, 2017.
In March 2016, the FASB issued ASU No. 2016-09,
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”). ASU 2016-09 is intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. For public companies, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted ASU 2016-09 on January 1, 2017, and elected to recognize forfeitures as they occur. The Company also elected to apply the change in classification of cash flows resulting from excess tax benefits or deficiencies on a retrospective basis. The adoption resulted in the Company recording a cumulative effect adjustment to retained earnings on January 1, 2017 totaling $841 for the differential between the amount of compensation cost previously recorded and the amount that would have been recorded without an applied estimated forfeiture assumption, as well as the recognition of previously unrecognized excess tax benefits of $6,507
through a cumulative effect adjustment to retained earnings as of January 1, 2017.
In June 2016, the FASB issued ASU No. 2016-13,
Financial Instruments – Credit Losses (Topic 326)
(“ASU 2016-13”). The amendments in ASU 2016-13 will supersede or clarify much of the existing guidance for reporting credit losses for assets held at amortized cost basis and available for sale debt securities. The amendments in ASU 2016-13 affect loans, debt securities, trade receivables, net investments in leases, off balance sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. ASU 2016-13 is effective for financial statements issued for fiscal years beginning after December 15, 2019, with early adoption permitted for fiscal years beginning after December 15, 2018.
The Company has not evaluated the impact of ASU 2016-13 on its consolidated financial statements.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
(“ASU 2016-15”). ASU 2016-15 provides guidance for eight targeted changes with respect to how cash receipts and cash payments are classified in the statements of cash flows, with the objective of reducing diversity in practice. ASU 2016-15 is effective for financial statements issued for fiscal years beginning after December 15, 2017, with early adoption permitted. The Company currently is evaluating the impact the adoption of this ASU will have on the presentation of the Company's consolidated statements of cash flows.
In November 2016, the FASB issued ASU No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash
(“ASU 2016-18”). ASU 2016-18 requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. ASU 2016-18 is effective for public entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period, however, any adjustments must be reflected as of the beginning of the fiscal year that includes that interim period. ASU 2016-18 must be adopted retrospectively. The Company currently is evaluating the impact the adoption of ASU 2016-18 will have on the presentation of the Company’s consolidated statements of cash flows.
3. Equity Investment
Mission Providence
The Company entered into a joint venture agreement in November 2014 to form Mission Providence Pty Ltd (“Mission Providence”). Mission Providence delivers employment preparation and placement services in Australia. The Company has a 60% ownership interest in Mission Providence, and has rights to 75% of Mission Providence’s distributions of cash or profit surplus twice per calendar year. The Company provided $8,000 and $16,072 in capital contributions in 2016 and 2015, respectively, to Mission Providence.
The Company determined it has a variable interest in Mission Providence. However, it does not have unilateral power to direct the activities that most significantly impact Mission Providence’s economic performance, which include budget approval, business planning, the appointment of key officers and liquidation and distribution of share capital. As a result, the Company is not the primary beneficiary of Mission Providence. The Company accounts for this investment under the equity method of accounting and the Company’s share of Mission Providence’s losses are recorded as “Equity in net loss of investees” in the accompanying consolidated statements of income. Cash contributions made to Mission Providence in exchange for its equity interests are included in the consolidated statements of cash flows as “Equity investments.” The investment is accounted for as part of WD Services.
The following table summarizes the carrying amounts of the assets and liabilities included in the Company’s consolidated balance sheet and the maximum loss exposure related to the Company’s interest in Mission Providence as of December 31, 2016 and 2015:
|
|
Equity
Investments
|
|
|
Accrued
Expenses
|
|
|
Maximum
Exposure to
Loss
|
|
December 31, 2016
|
|
$
|
4,021
|
|
|
$
|
-
|
|
|
$
|
4,021
|
|
December 31, 2015
|
|
$
|
9,324
|
|
|
$
|
4,654
|
|
|
$
|
9,324
|
|
Summary financial information for Mission Providence on a standalone basis is as follows:
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
Current assets
|
|
$
|
4,640
|
|
|
$
|
7,789
|
|
Long-term assets
|
|
|
10,473
|
|
|
|
8,869
|
|
Current liabilities
|
|
|
12,844
|
|
|
|
10,488
|
|
Long-term liabilities
|
|
|
1,655
|
|
|
|
-
|
|
|
|
Year ended December 31,
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
$
|
36,546
|
|
|
$
|
11,206
|
|
Operating loss
|
|
|
(9,664
|
)
|
|
|
(19,397
|
)
|
Net loss
|
|
|
(8,843
|
)
|
|
|
(13,106
|
)
|
Matrix
As a result of the Matrix Transaction, the Company’s remaining ownership in Matrix is a noncontrolling interest effective October 19, 2016. In addition, pursuant to a Shareholder’s Agreement, the third-party subscriber holds rights necessary to control the fundamental operations of Matrix. The Company accounts for this investment under the equity method of accounting and the Company’s share of Matrix’s losses are recorded as “Equity in net loss of investee” in the accompanying consolidated statements of income. The Company’s retained interest of 46.8% in Matrix upon the closing of the stock subscription transaction was recorded at fair value based upon the fair value of the subscriber’s 53.2% interest in Matrix. See additional information on the transaction in Note 21,
Discontinued Operations
.
The carrying amount of the assets included in the Company’s consolidated balance sheet and the maximum loss exposure related to the Company’s interest in Matrix as of December 31, 2016 totaled $157,202.
Summary financial information for Matrix on a standalone basis is as follows:
|
|
December 31, 2016
|
|
Current assets
|
|
$
|
28,589
|
|
Long-term assets
|
|
|
614,841
|
|
Current liabilities
|
|
|
25,791
|
|
Long-term liabilities
|
|
|
281,348
|
|
|
|
October 19, 2016
through
December 31, 2016
|
|
Revenue
|
|
$
|
41,635
|
|
Operating loss
|
|
|
(4,079
|
)
|
Net loss
|
|
|
(4,200
|
)
|
Included in Matrix’s operating loss is depreciation and amortization of $6,356 and transaction related expenses of $6,367, which includes $4,033 of transaction incentive compensation.
4. Prepaid Expenses and Other
Prepaid expenses and other were comprised of the following:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Prepaid income taxes
|
|
$
|
1,467
|
|
|
$
|
1,607
|
|
Escrow funds
|
|
|
10,000
|
|
|
|
-
|
|
Prepaid insurance
|
|
|
3,153
|
|
|
|
2,971
|
|
Prepaid taxes and licenses
|
|
|
3,570
|
|
|
|
4,895
|
|
Note receivable
|
|
|
3,130
|
|
|
|
-
|
|
Prepaid rent
|
|
|
2,013
|
|
|
|
2,235
|
|
Deposits held for leased premises and bonds
|
|
|
2,609
|
|
|
|
2,574
|
|
Other
|
|
|
12,139
|
|
|
|
13,342
|
|
|
|
|
|
|
|
|
|
|
Total prepaid expenses and other
|
|
$
|
38,081
|
|
|
$
|
27,624
|
|
Escrow funds relate to the sale of the Human Services segment, which was completed on November 1, 2015. The escrow funds are scheduled to be released fifteen months following the closing, although the amount to be released is subject to reduction to the extent indemnified representation and warranty claims are identified and agreed with the buyer. During 2016, the Company recorded $6,000 in Accrued Liabilities, as an estimate of potential claims against the escrow funds, and as such, the escrow funds have not yet been released. See Note 19,
Commitments and Contingencies
, for further information.
5. Property and Equipment
Property and equipment consisted of the following:
|
|
Estimated
|
|
|
|
|
Useful
|
|
December 31,
|
|
|
|
Life (years)
|
|
2016
|
|
|
2015
|
|
Land
|
|
|
--
|
|
|
$
|
-
|
|
|
$
|
1,182
|
|
Building
|
|
|
39
|
|
|
|
-
|
|
|
|
5,214
|
|
Computer and telecom equipment
|
|
3
|
-
|
5
|
|
|
31,854
|
|
|
|
27,046
|
|
Software
|
|
3
|
-
|
5
|
|
|
26,883
|
|
|
|
19,497
|
|
Leasehold improvements
|
|
Shorter of 7 years or
lease term
|
|
|
16,720
|
|
|
|
16,122
|
|
Furniture and fixtures
|
|
5
|
-
|
10
|
|
|
8,070
|
|
|
|
5,815
|
|
Automobiles
|
|
|
5
|
|
|
|
3,597
|
|
|
|
3,471
|
|
Construction and development in progress
|
|
|
--
|
|
|
|
5,831
|
|
|
|
1,956
|
|
|
|
|
|
|
|
|
92,955
|
|
|
|
80,303
|
|
Less accumulated depreciation
|
|
|
|
|
|
|
46,735
|
|
|
|
34,145
|
|
Total property and equipment, net
|
|
|
|
|
|
$
|
46,220
|
|
|
$
|
46,158
|
|
Depreciation expense from continuing operations was $18,038, $14,488 and $10,241 for the years ended December 31, 2016, 2015 and 2014, respectively.
The Company sold the building and land that included holding company office space in Arizona effective December 30, 2016 resulting in an asset impairment charge of $1,415 for the year ended December 31, 2016. The Company recorded an asset impairment charge of $9,983 related to its WD Services segment based on its review of the carrying value of long-lived assets. The impairment charges are reflected in “Asset impairment charge” in the consolidated statement of income for the year ended December 31, 2016. See Note 6,
Goodwill and Intangibles¸
for further discussion of the impairment charges incurred related to the WD Services segment during 2016.
6. Goodwill and Intangibles
Impairment
During the fourth quarter of 2016, the Company reviewed WD Services for impairment, primarily due to
lower than expected volumes and unfavorable service mix shifts under a large contract in the United Kingdom (“UK”) impacting future projections; additional clarity into the anticipated size and structure of the Work and Health Programme in the UK; the absence of additional details regarding the restructuring of the offender rehabilitation contract in the UK; and a change in senior management at WD Services during the fourth quarter. As a result, the Company performed a quantitative test comparing the fair value of the asset groupings comprising WD Services with the carrying amounts and recorded an asset impairment charge of $4,381 to definite-lived customer relationship intangible assets, which is recorded in “Asset impairment charge” on the Company’s consolidated statement of operations. In addition, the Company reviewed the carrying value of goodwill of WD Services, noting the carrying value exceeded the fair value. Therefore, the Company performed the second step of the impairment test, in which the fair value of the reporting unit is allocated to all of the assets and liabilities, on a fair value basis, with any excess representing the implied value of goodwill of the reporting unit. The fair value was determined using an income approach, which estimates the present value of future cash flows based on management’s forecast of revenue growth rates and operating margins, working capital requirements and capital expenditures. Based on this analysis, the carrying value of goodwill of the WD Services reporting unit exceeded the implied fair value and the Company recorded an asset impairment charge of $5,224, which is included in “Asset impairment charge” on the Company’s consolidated statement of operations.
The Company reviewed the carrying value of other long-lived assets and goodwill, and noted no indicators of impairment for NET Services or the Matrix Investment.
Goodwill
Changes in goodwill were as follows:
|
|
NET
|
|
|
WD
|
|
|
Consolidated
|
|
|
|
Services
|
|
|
Services
|
|
|
Total
|
|
Balances at December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
191,215
|
|
|
$
|
42,662
|
|
|
$
|
233,877
|
|
Accumulated impairment losses
|
|
|
(96,000
|
)
|
|
|
(6,041
|
)
|
|
|
(102,041
|
)
|
|
|
|
95,215
|
|
|
|
36,621
|
|
|
|
131,836
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
(1,878
|
)
|
|
|
(1,878
|
)
|
Balances at December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
191,215
|
|
|
|
40,784
|
|
|
|
231,999
|
|
Accumulated impairment losses
|
|
|
(96,000
|
)
|
|
|
(6,041
|
)
|
|
|
(102,041
|
)
|
|
|
|
95,215
|
|
|
|
34,743
|
|
|
|
129,958
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset impairment charge
|
|
|
-
|
|
|
|
(5,224
|
)
|
|
|
(5,224
|
)
|
Foreign currency translation adjustment
|
|
|
-
|
|
|
|
(5,110
|
)
|
|
|
(5,110
|
)
|
Balances at December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
191,215
|
|
|
|
35,674
|
|
|
|
226,889
|
|
Accumulated impairment losses
|
|
|
(96,000
|
)
|
|
|
(11,265
|
)
|
|
|
(107,265
|
)
|
|
|
$
|
95,215
|
|
|
$
|
24,409
|
|
|
$
|
119,624
|
|
The total amount of goodwill that was deductible for income tax purposes related to acquisitions as of December 31, 2016 and 2015 was $4,222.
Intangible Assets
Intangible assets are comprised of acquired customer relationships, trademarks and trade names, and developed technology. Intangible assets consisted of the following:
|
|
|
December 31,
|
|
|
|
|
2016
|
|
2015
|
|
|
Estimated
|
|
Gross
|
|
|
|
|
Gross
|
|
|
|
|
|
|
Useful
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Life (Yrs)
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amortization
|
|
Customer relationships
|
15
|
|
$
|
48,020
|
|
|
$
|
(29,941
|
)
|
|
$
|
47,973
|
|
|
$
|
(26,804
|
)
|
Customer relationships
|
10
|
|
|
27,915
|
|
|
|
(8,147
|
)
|
|
|
38,688
|
|
|
|
(6,126
|
)
|
Trademarks and Trade Names
|
10
|
|
|
13,282
|
|
|
|
(3,431
|
)
|
|
|
15,936
|
|
|
|
(2,523
|
)
|
Developed technology
|
5
|
|
|
2,951
|
|
|
|
(1,525
|
)
|
|
|
3,541
|
|
|
|
(1,121
|
)
|
Total
|
|
$
|
92,168
|
|
|
$
|
(43,044
|
)
|
|
$
|
106,138
|
|
|
$
|
(36,574
|
)
|
The gross carrying amount as of December 31, 2016 includes the asset impairment charge of $4,381 to definite-lived customer relationship intangible assets of WD Services. The weighted-average amortization period at December 31, 2016 for intangibles with a definite life was 12.4 years. No significant residual value is estimated for these intangible assets. Amortization expense from continuing operations was $8,566, $9,510 and $6,973 for the years ended December 31, 2016, 2015 and 2014, respectively. The total amortization expense is estimated to be as follows for the next five years and thereafter as of December 31, 2016 based upon the applicable foreign exchange rates as of December 31, 2016:
Year
|
|
Amount
|
|
2017
|
|
$
|
7,682
|
|
2018
|
|
|
7,682
|
|
2019
|
|
|
7,338
|
|
2020
|
|
|
7,092
|
|
2021
|
|
|
7,017
|
|
Thereafter
|
|
|
12,313
|
|
Total
|
|
$
|
49,124
|
|
7. Accrued Expenses
Accrued expenses consisted of the following:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Accrued compensation
|
|
$
|
23,050
|
|
|
$
|
20,523
|
|
NET Services accrued contract payments
|
|
|
32,001
|
|
|
|
26,669
|
|
Income taxes payable
|
|
|
372
|
|
|
|
24,200
|
|
Other
|
|
|
45,449
|
|
|
|
46,044
|
|
Total accrued expenses
|
|
$
|
100,872
|
|
|
$
|
117,436
|
|
8. Restructuring
, Redundancy
and Related Reorganization Costs
In the fourth quarter of 2016, WD Services approved a redundancy plan related to the termination of employees as part of a value enhancement project (“Ingeus Futures’ Program”) to better align costs at Ingeus with revenue. In the fourth quarter of 2015, WD Services approved two redundancy plans. The first plan relates to the termination of employees delivering services under an offender rehabilitation program (“Offender Rehabilitation Program”). The second plan primarily relates to the termination of employees delivering services under the Company’s employability and skills training programs and certain other employees in the UK (“UK Restructuring Program”). The Company recorded severance and related charges of $8,511 and $10,551 during the years ended December 31, 2016 and 2015, respectively, relating to the termination benefits for employee groups and specifically identified employees impacted by these plans. The severance charges incurred are recorded as “Service expense” in the accompanying consolidated statements of income.
The initial estimate of severance and related charges at December 31, 2015 for the Offender Rehabilitation Program and UK Restructuring Program and at December 31, 2016 for the Ingeus Futures’ Program was based upon the employee groups impacted, average salary and benefits, and redundancy benefits pursuant to the existing policies. The charges incurred for the Offender Rehabilitation Program and UK Restructuring Program during 2016 related to the actualization of termination benefits for specifically identified employees impacted, as well as an increase in the number of individuals impacted by these plans. The final identification of the employees impacted by each program is subject to customary consultation procedures. Additionally, the Company anticipates the potential for further redundancy expenses under the Ingeus Futures’ Program as further costs become estimable.
Summary of Severance and Related Charges
|
|
January 1,
2016
|
|
|
Costs
Incurred
|
|
|
Cash Payments
|
|
|
Foreign Exchange
Rate Adjustments
|
|
|
December 31,
2016
|
|
Ingeus Futures' Program
|
|
$
|
-
|
|
|
$
|
2,456
|
|
|
$
|
-
|
|
|
$
|
(29
|
)
|
|
$
|
2,427
|
|
Offender Rehabilitation Program
|
|
|
6,538
|
|
|
|
4,865
|
|
|
|
(8,924
|
)
|
|
|
(1,099
|
)
|
|
|
1,380
|
|
UK Restructuring Program
|
|
|
2,059
|
|
|
|
1,190
|
|
|
|
(3,031
|
)
|
|
|
(109
|
)
|
|
|
109
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,597
|
|
|
$
|
8,511
|
|
|
$
|
(11,955
|
)
|
|
$
|
(1,237
|
)
|
|
$
|
3,916
|
|
|
|
January 1,
2015
|
|
|
Costs
Incurred
|
|
|
Cash Payments
|
|
|
Foreign Exchange
Rate Adjustments
|
|
|
December 31,
2015
|
|
Offender Rehabilitation Program
|
|
$
|
-
|
|
|
$
|
8,465
|
|
|
$
|
(1,839
|
)
|
|
$
|
(88
|
)
|
|
$
|
6,538
|
|
UK Restructuring Program
|
|
|
-
|
|
|
|
2,086
|
|
|
|
-
|
|
|
|
(27
|
)
|
|
|
2,059
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
$
|
10,551
|
|
|
$
|
(1,839
|
)
|
|
$
|
(115
|
)
|
|
$
|
8,597
|
|
The total of accrued severance and related costs of $3,916 and $8,597 are reflected in “Accrued expenses” in the consolidated balance sheets at December 31, 2016 and 2015, respectively. The amount accrued as of December 31, 2016 for the Ingeus Futures’ Program, Offender Rehabilitation Program and UK Restructuring Program is expected to be settled by the end of 2017.
9. Fair Value Measurements
The fair value of liabilities measured at fair value on a recurring basis was zero at December 31, 2016 and 2015. There were no transfers between Level 1 and Level 2, or into or out of Level 3, during 2016 and 2015.
The changes in Level 3 liabilities measured at fair value on a recurring basis were as follows for the years ended December 31, 2015 and 2014:
|
|
Contingent Consideration Liabilities
|
|
|
|
December 31, 2015
|
|
|
December 31, 2014
|
|
Balance at the beginning of year
|
|
$
|
10,549
|
|
|
$
|
-
|
|
Initial valuation upon acquistion
|
|
|
-
|
|
|
|
30,095
|
|
Payments
|
|
|
(7,496
|
)
|
|
|
-
|
|
Gain in general and administrative expense
|
|
|
(2,469
|
)
|
|
|
(16,314
|
)
|
Foreign exchange revaluation
|
|
|
(584
|
)
|
|
|
(3,232
|
)
|
Balance at end of year
|
|
$
|
-
|
|
|
$
|
10,549
|
|
There were no events that occurred during the year ended December 31, 2016 that would indicate a fair value greater than zero for the contingent consideration liabilities. The valuation techniques and significant unobservable inputs used in recurring Level 3 fair value measurements were as follows at December 31, 2015:
|
|
|
|
|
|
Significant
|
|
|
|
|
December 31, 2015
|
|
Fair Value
|
|
Valuation Technique
|
Unobservable Inputs
|
|
Value
|
|
Contingent consideration liabilities
|
|
$
|
-
|
|
Discounted probability-weighted approach
|
Discount rate
|
|
|
14.12
|
%
|
Financial liabilities that were not remeasured at fair value were as follows:
|
|
|
|
|
December 31, 2016
|
|
|
December 31, 2015
|
|
|
|
Fair Value
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Level
|
|
|
Value
|
|
|
Fair Value
|
|
|
Value
|
|
|
Fair Value
|
|
Financial liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Credit facility
|
|
|
3
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
304,950
|
|
|
$
|
308,892
|
|
10. Long-Term Obligations
The Company’s long-term obligations were as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
$200,000 revolving loan, LIBOR plus 2.25% - 3.25% with interest payable at least once every three months through August 2018
|
|
$
|
-
|
|
|
$
|
19,700
|
|
$250,000 term loan, LIBOR plus 2.25% - 3.25% with principal payable quarterly beginning March 31, 2015 and interest payable at least once every three months, repaid October 2016
|
|
|
-
|
|
|
|
231,250
|
|
$60,000 term loan, LIBOR plus 2.25% - 3.25% with principal payable quarterly beginning December 31, 2014 and interest payable at least once every three months, repaid October 2016
|
|
|
-
|
|
|
|
54,000
|
|
Capital lease obligations
|
|
|
3,611
|
|
|
|
-
|
|
|
|
|
3,611
|
|
|
|
304,950
|
|
Unamortized discount on debt
|
|
|
-
|
|
|
|
(4,879
|
)
|
|
|
|
3,611
|
|
|
|
300,071
|
|
Less current portion
|
|
|
1,721
|
|
|
|
31,375
|
|
Total long-term obligations, less current portion
|
|
$
|
1,890
|
|
|
$
|
268,696
|
|
Unamortized discount on debt as of December 31, 2015 includes $3,774 of deferred financing costs related to the Company’s term loans and revolving loan. As described below, in conjunction with the Matrix Transaction, the Company permanently repaid the outstanding term loans and reduced the capacity under the revolving loan. As of December 31, 2016, there were no borrowings outstanding under the revolving loan, and thus the deferred financing costs of $1,070 are included in Other Assets.
Annual maturities of capital lease obligations as of December 31, 2016 are as follows:
Year
|
|
Amount
|
|
2017
|
|
$
|
1,721
|
|
2018
|
|
|
1,763
|
|
2019
|
|
|
127
|
|
Total
|
|
$
|
3,611
|
|
Current
Credit Facility and Impact of the Matrix Transaction
On August 28, 2016, the Company entered into the Fourth Amendment and Consent (the “Fourth Amendment”) to the Amended and Restated Credit and Guaranty Agreement (as amended, modified or supplemented, the “Credit Agreement”). The Fourth Amendment provided for the lenders’ consent to the Matrix Transaction and additionally required the net cash proceeds received by the Company 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. Additionally, effective following the repayment of the outstanding term loans in full on October 20, 2016, the Fourth 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 the Company’s consolidated net leverage ratio may not be greater than 3.00:1.00 as of the end of any fiscal quarter, (iii) replaced the existing consolidated fixed charge coverage ratio covenant with a covenant that the Company’s consolidated interest coverage ratio may not be less than 3.00:1.00 as of the end of any fiscal quarter and (iv) amended the Credit Agreement to make certain other changes to the terms thereof.
The outstanding loans under the Credit Facility were fully paid on October 20, 2016. No further amounts may be borrowed under the term loan facility. Upon the repayment, the Company wrote-off the deferred financing fees associated with the term loans, as well as a portion of deferred financing fees associated with the Credit Facility due to the reduction of the aggregate revolving commitment. The total write-off was $2,302 which is included in “Discontinued operations, net of tax” in the accompanying consolidated statement of income for the year ended December 31, 2016.
The Company had no borrowings outstanding under the Credit Facility as of December 31, 2016. $25,000 of the Credit Facility is available to collateralize certain letters of credit. As of December 31, 2016, six letters of credit in the amount of $5,414 were outstanding. At December 31, 2016, the Company’s available credit under the Credit Facility was $194,586.
The Company’s obligations under the Credit Facility are guaranteed by all of the Company’s present and future domestic subsidiaries, excluding certain domestic subsidiaries which include the Company’s insurance captives. The Company’s obligations under, and each guarantor’s obligations under its guaranty of, the Credit Facility are secured by a first priority lien on substantially all of the Company’s respective assets, including a pledge of 100% of the issued and outstanding stock of the Company’s domestic subsidiaries, excluding the Company’s insurance captives, and 65% of the issued and outstanding stock of the Company’s first tier foreign subsidiaries. However, in connection with the completion of the Matrix stock subscription, Matrix was released as a guarantor of the Company’s obligations under its Credit Agreement and Matrix’s property is no longer pledged to secure such obligations.
Credit Facility Background
On August 2, 2013, the Company entered the 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 Credit Agreement provided the Company with the Credit Facility in the aggregate principal amount of $225,000, comprised of a $60,000 term loan facility and a $165,000 revolving credit facility. The Credit Facility includes sublimits for swingline loans and letters of credit in amounts up to $10,000 and $25,000, respectively. On August 2, 2013, the Company borrowed the entire amount available under the term loan facility and $16,000 under the revolving credit facility and used the proceeds thereof to refinance certain of the Company’s existing indebtedness.
On May 28, 2014 the Company entered into the First Amendment to the Credit Agreement (the “First Amendment”). The First Amendment provided for, among other things, an increase in the aggregate amount of the revolving credit facility from $165,000 to $240,000 and other modifications in connection with the consummation of the acquisition of Ingeus.
On October 23, 2014, the Company entered into the Second Amendment to the Credit Agreement (the “Second Amendment”) to amend the Credit Facility to (i) add a new term loan tranche in the aggregate principal amount of up to $250,000 to partly finance the acquisition of Matrix, (ii) provide the consent of the required lenders to consummate the acquisition of Matrix, (iii) permit incurrence of additional debt to fund the acquisition of Matrix and, (iv) add an excess cash flow mandatory prepayment provision.
On September 3, 2015, the Company entered into the Third Amendment to the Credit Agreement (the “Third Amendment”) to amend the Credit Agreement to (i) allow the lenders under the Credit Agreement to consent to the Company’s sale of the Human Services segment, provided that a minimum amount equal to 50% of the net cash proceeds, as defined in the Credit Agreement, of the sale is applied pro rata to the prepayment of revolving loans and swingline loans under the Credit Agreement and (ii) allow the lenders to consent to the Company’s use of 50% of the net cash proceeds of the sale to make restricted payments to repurchase common stock pursuant to a Providence stock repurchase program. The Third Amendment provided for amendments to the terms of the Credit Agreement to reflect such consents.
Under the Credit Agreement, as amended through the Fourth Amendment, 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 $75,000 with either additional commitments from lenders under the Credit Agreement at such time or new commitments from financial institutions acceptable to the administrative agent in its reasonable discretion, so long as no default or event of default exists at the time of any such increase. The Company may not be able to access additional funds under this option as no lender is obligated to participate in any such increase under the Credit Facility.
The Credit Facility matures on August 2, 2018. The Company may prepay the 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, or LIBOR, loans. The unutilized portion of the commitments under the Credit Facility may be irrevocably reduced or terminated by the Company 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 as defined in the agreement plus an applicable margin. The applicable margin ranges from 2.25% to 3.25% in the case of LIBOR loans and 1.25% to 2.25% in the case of the base rate loans, in each case, based on the Company’s consolidated leverage ratio as defined in the 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 Credit Facility and quarterly letter of credit fees based on a percentage of the maximum amount available to be drawn under each outstanding letter of credit. The commitment fee and letter of credit fee range from 0.25% to 0.50% and 2.25% to 3.25%, respectively, in each case, based on the Company’s consolidated leverage ratio.
The 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 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 interest coverage covenants.
Capital Leases
NET Services has four capital leases for information technology equipment with termination dates ranging from January 2018 through September 2019. The terms of the leases are between 21 and 36 months, with interest recorded at an incremental borrowing rate of 3.28%. At December 31, 2016, $4,571 represents equipment under capital leases and $460 represents accumulated depreciation recognized on this leased equipment.
11. Convertible Preferred Stock, Net
The Company completed a rights offering on February 5, 2015 (the “Rights Offering”) providing 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 (“Preferred Stock”). The Preferred Stock is convertible into shares of Providence’s Company’s common stock, $0.001 par value per share (“Common Stock) at a conversion price equal to $39.88 per share, which was the closing price of the Company’s 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 Preferred Stock. Pursuant to the terms and conditions of the Standby Purchase Agreement (the “Standby Purchase Agreement”) between Coliseum Capital Partners, L.P., Coliseum Capital Partners II, L.P., Coliseum Capital Co-Invest, L.P. and Blackwell Partners, LLC (collectively, the “Standby Purchasers”) and the Company, the remaining 524,116 shares of the Company’s Preferred Stock were purchased by the Standby Purchasers at the $100.00 per share subscription price. The Company received $65,500 in aggregate gross proceeds from the consummation of the Rights Offering and Standby Purchase Agreement. Additionally, on March 12, 2015, the Standby Purchasers exercised their right to purchase an additional 150,000 shares of the Company’s Preferred Stock, at a purchase price of $105.00 per share or a total purchase price of $15,750, of the same series and having the same conversion price as the Preferred Stock sold in the Rights Offering.
The Company may pay a noncumulative cash dividend on each share of Preferred Stock, if and when declared by a committee of its Board of Directors (“Board”), at the rate of five and one-half percent (5.5%) per annum on the liquidation preference then in effect. On or before the third business day immediately preceding each fiscal quarter, the Company must determine its intention whether or not to pay a cash dividend with respect to that ensuing quarter and will give notice of its intention to each holder of Preferred Stock as soon as practicable thereafter.
In the event the Company does not declare and pay a cash dividend, the Company will declare a paid in kind (“PIK”) dividend by increasing the liquidation preference of the convertible Preferred Stock to an amount equal to the liquidation preference in effect at the start of the applicable dividend period, plus an amount equal to the liquidation preference then in effect 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. All holders of the Company’s Preferred Stock are able to convert their Preferred Stock into shares of Common Stock at a rate of approximately 2.51 shares of Common Stock for each share of Preferred Stock. As of December 31, 2016, 1,602 shares of Preferred Stock have been converted to 4,015 shares of Common Stock.
Cash dividends are payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year, which commenced on April 1, 2015, and, if declared, begin to accrue on the first day of the applicable dividend period. PIK dividends, if applicable, accrue cumulatively on the same schedule as set forth above for cash dividends and are also compounded at the applicable annual rate on each applicable subsequent dividend date. Cash dividends totaling $4,419 and $3,928 were distributed to convertible preferred stockholders for the years ended December 31, 2016 and 2015, respectively.
The Preferred Stock is accounted for outside of stockholders’ equity as it may be redeemed upon certain change in control events that are not solely in the control of the Company. Dividends are recorded in stockholders’ equity and consist of the 5.5%/8.5% dividend. At the time of issuance of the Preferred Stock, the Company recorded a discount on Preferred Stock related to beneficial conversion features that arose due to the closing price of the Company’s Common Stock being higher than the conversion price of the Preferred Stock on the commitment date. The amortization of this discount was recorded in stockholders’ equity. The discount was fully amortized as of June 30, 2015.
The following table summarizes the Preferred Stock activity for the years ended December 31, 2016 and 2015:
|
|
Dollar Value
|
|
|
Share Count
|
|
Balance at December 31, 2014
|
|
$
|
-
|
|
|
|
-
|
|
Shares issued
|
|
|
81,250
|
|
|
|
805,000
|
|
Issuance costs
|
|
|
(3,531
|
)
|
|
|
-
|
|
Beneficial conversion feature
|
|
|
(1,071
|
)
|
|
|
-
|
|
Amortization of beneficial conversion feature
|
|
|
1,071
|
|
|
|
-
|
|
Conversion to common stock
|
|
|
(149
|
)
|
|
|
(1,482
|
)
|
Allocation of issuance costs
|
|
|
6
|
|
|
|
-
|
|
Balance at December 31, 2015
|
|
$
|
77,576
|
|
|
|
803,518
|
|
Conversion to common stock
|
|
|
(12
|
)
|
|
|
(120
|
)
|
Allocation of issuance costs
|
|
|
1
|
|
|
|
-
|
|
Balance at December 31, 2016
|
|
$
|
77,565
|
|
|
|
803,398
|
|
As of December 31, 2016 and 2015, the outstanding shares of Preferred Stock were convertible into 2,014,538 and 2,014,840 shares of Common Stock, respectively.
12. Stockholders’ Equity
At December 31, 2016 and 2015 there were 17,315,661 and 17,186,780 shares of the Company’s Common Stock issued, respectively, including 3,478,676 and 1,895,998 treasury shares at December 31, 2016 and 2015, respectively.
Subject to the rights specifically granted to holders of any then outstanding shares of the Company’s Preferred Stock, the Company’s common stockholders are entitled to vote together as a class on all matters submitted to a vote of the Company’s common stockholders, and are entitled to any dividends that may be declared by the Board. The Company’s common stockholders do not have cumulative voting rights. Upon the Company’s dissolution, liquidation or winding up, holders of the Company’s Common Stock are entitled to share ratably in the Company’s net assets after payment or provision for all liabilities and any preferential liquidation rights of the Company’s Preferred Stock then outstanding. The Company’s common stockholders do not have preemptive rights to purchase shares of the Company’s stock. The issued and outstanding shares of the Company’s Common Stock are not subject to any redemption provisions and are not convertible into any other shares of the Company’s capital stock. The rights, preferences and privileges of holders of the Company’s Common Stock will be subject to those of the holders of any shares of the Company’s Preferred Stock the Company may issue in the future.
During the year ended December 31, 2014, the sellers of WCG International Consultants Ltd. (“WCG”) surrendered 39,162 exchangeable shares of PSC of Canada Exchange Corp. (“PSC”) to fulfill their obligation to the Company for the settlement of a dispute and the reimbursement of legal fees. These shares were converted to shares of the Company and transferred to treasury. Additionally, 222,532 exchangeable shares of PSC were exchanged into shares of Common Stock of the Company and distributed to the sellers of WCG, thus eliminating the related noncontrolling interest balance as of December 31, 2014.
During the year ended December 31, 2014, the Company issued stock, with certain escrow restrictions, in conjunction with the acquisitions of Ingeus and Matrix.
The following table reflects the total number of shares of the Company’s Common Stock reserved for future issuance as of December 31, 2016:
Shares of common stock reserved for:
|
|
|
|
|
Exercise of stock options and restricted stock awards
|
|
|
437,930
|
|
Conversion of preferred stock to common stock
|
|
|
2,014,538
|
|
Issuance of Performance Restricted Stock Units
|
|
|
49,208
|
|
|
|
|
|
|
Total shares of common stock reserved for future issuance
|
|
|
2,501,676
|
|
Share Repurchases
On February 1, 2007, the Board approved a stock repurchase program for up to one million shares of its Common Stock under which the Company spent $14,376 to purchase 756,100 shares of its Common Stock in the open market through December 31, 2012. No repurchases have been made since 2012. This program was formally terminated in January 2016.
On October 14, 2015, the Company entered into an agreement to repurchase 707,318 of its Common Stock held by former stockholders of Matrix for an aggregate purchase price of $29,000 (or $41.00 per share). The Company funded this purchase through a combination of borrowing on its Credit Facility and cash on hand. The purchase of these shares was completed on October 30, 2015.
On November 4, 2015, the Board authorized the Company to engage in a repurchase program to repurchase up to $70,000 in aggregate value of the Company’s Common Stock during the twelve-month period following November 4, 2015. This plan terminated on November 3, 2016. A total of 1,360,249 shares were purchased through this plan for $62,981, excluding commission payments.
On October 26, 2016, the Board authorized a new repurchase program, under which the Company may repurchase up to $100,000 in aggregate value of the Company’s Common Stock during the twelve-month period following October 26, 2016. As of December 31, 2016, 328,843 shares were purchased through this plan for $12,377, excluding commission payments.
During the years ended December 31, 2016, 2015 and 2014, the Company repurchased 2,736, 15,961 and 18,504 shares, respectively, from employees to cover the settlement of income tax and related benefit withholding obligations arising from vesting of restricted stock awards. In addition, in 2015, the Company withheld 5,718 shares for the payment of the exercise price upon the exercise of stock options and 43,743 shares to cover the settlement of income tax and related benefit withholding obligations arising from shares held by employees that were released from escrow related to the Matrix acquisition, which shares are treated as treasury stock.
13. Stock-Based Compensation and Similar Arrangements
The Company provides stock-based compensation to employees, non-employee directors, consultants and advisors under the Company’s 2006 Long-Term Incentive Plan (“2006 Plan”). The 2006 Plan allows the flexibility to grant or award stock options, stock appreciation rights, restricted stock, unrestricted stock, stock units including restricted stock units and performance awards to eligible persons. The following table summarizes the activity under the 2006 Plan as of December 31, 2016:
|
|
|
|
|
|
Number of shares
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares
|
|
|
of the Company's
|
|
|
|
|
|
|
|
|
|
|
|
of the Company's
|
|
|
common stock
|
|
|
|
|
|
|
|
|
|
|
|
common stock
|
|
|
remaining
|
|
|
Number of shares of the Company's
|
|
|
|
authorized for
|
|
|
available for
|
|
|
common stock subject to
|
|
|
|
issuance
|
|
|
future grants
|
|
|
Stock Options
|
|
|
Stock Grants
|
|
2006 Plan
|
|
|
5,400,000
|
|
|
|
2,324,927
|
|
|
|
355,598
|
|
|
|
131,540
|
|
The following table reflects the amount of stock-based compensation, for share settled awards issued to employees and non-employee directors, recorded in each financial statement line item for the years ended December 31, 2016, 2015 and 2014:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Service expense
|
|
$
|
830
|
|
|
$
|
21,480
|
|
|
$
|
4,019
|
|
General and administrative expense
|
|
|
4,324
|
|
|
|
5,027
|
|
|
|
3,537
|
|
Discontinued operations, net of tax
|
|
|
(18
|
)
|
|
|
115
|
|
|
|
6
|
|
Total stock-based compensation
|
|
$
|
5,136
|
|
|
$
|
26,622
|
|
|
$
|
7,562
|
|
Stock-based compensation included in service expense is related to the following segments:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
NET Services
|
|
$
|
841
|
|
|
$
|
724
|
|
|
$
|
587
|
|
WD Services (a)
|
|
|
(11
|
)
|
|
|
20,756
|
|
|
|
3,432
|
|
Total stock-based compensation in service expense
|
|
$
|
830
|
|
|
$
|
21,480
|
|
|
$
|
4,019
|
|
|
(a)
|
WD Services includes $16,078 for the year ended December 31, 2015 related to the acceleration of awards pursuant to the separation agreements for two executives.
|
The amounts above exclude the tax benefit of $2,072, $2,322 and $1,570 for the years ended December 31, 2016, 2015 and 2014, respectively. For the years ended December 31, 2016, 2015 and 2014, the amount of excess tax benefits resulting from the exercise of stock options was $282,
$2,857 and $2,722, respectively. For the years ended December 31, 2016, 2015 and 2014, the Company had tax shortfalls resulting from the exercise of stock options of $558
, $151 and $38, respectively. The excess tax benefits resulting from the exercise of stock options are reflected as cash flows from financing activities for the years ended December 31, 2016, 2015 and 2014 in the consolidated statements of cash flows.
Stock Options
During the year ended December 31, 2016, the Company did not grant any stock options. The fair value of each stock option awarded to employees is estimated on the date of grant using the Black-Scholes option-pricing formula based on the following assumptions:
|
|
Year ended December 31,
|
|
|
2015
|
|
2014
|
Expected dividend yield
|
|
|
0.0%
|
|
|
|
0.0%
|
|
Expected stock price volatility
|
|
33.84%
|
-
|
46.14%
|
|
45.6%
|
-
|
50.25%
|
Risk-free interest rate
|
|
0.35%
|
-
|
1.35%
|
|
1.1%
|
-
|
1.88%
|
Expected life of options (years)
|
|
10 days
|
-
|
4
|
|
3.25
|
-
|
5.47
|
The risk-free interest rate was based on the U.S. Treasury security rate in effect as of the date of grant which corresponds to the expected life of the award. The expected lives of options and the expected stock price volatility were based on the Company’s historical data, or the Company’s best estimate where appropriate.
During the year ended December 31, 2016, the Company issued 105,788 shares of its Common Stock in connection with the exercise of employee stock options under the Company’s 2006 Plan.
The following table summarizes the stock option activity for the year ended December 31, 2016:
|
|
Year ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
Number
|
|
|
Weighted-
|
|
|
average
|
|
|
|
|
|
|
|
of Shares
|
|
|
average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Under
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Option
|
|
|
Price
|
|
|
Term
|
|
|
Value
|
|
Balance at beginning of period
|
|
|
505,452
|
|
|
$
|
34.84
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(105,788
|
)
|
|
|
38.83
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(27,400
|
)
|
|
|
31.48
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(16,666
|
)
|
|
|
43.81
|
|
|
|
|
|
|
|
|
|
Outstanding at end of period
|
|
|
355,598
|
|
|
$
|
33.48
|
|
|
|
3.41
|
|
|
$
|
2,514
|
|
Vested or expected to vest at end of period
|
|
|
344,574
|
|
|
$
|
33.33
|
|
|
|
3.46
|
|
|
$
|
2,500
|
|
Exercisable at end
of period
|
|
|
232,141
|
|
|
$
|
30.86
|
|
|
|
4.22
|
|
|
$
|
2,355
|
|
The weighted-average grant-date fair value for options granted, total intrinsic value and cash received by the Company related to options exercised during the years ended December 31, 2016, 2015 and 2014 were as follows:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Weighted-average grant date fair value
|
|
$
|
-
|
|
|
$
|
8.77
|
|
|
$
|
17.09
|
|
Options exercised:
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intrinsic value
|
|
$
|
979
|
|
|
$
|
6,659
|
|
|
$
|
9,107
|
|
Cash received
|
|
$
|
4,108
|
|
|
$
|
4,895
|
|
|
$
|
11,019
|
|
Stock Option Modifications
During the second quarter of 2015, Warren Rustand terminated his role as Chief Executive Officer (“CEO”) and board member of the Company, but remained employed as a Senior Advisor through the end of 2015. As a result of Mr. Rustand’s termination as CEO, a Separation Agreement was entered into between the Company and Mr. Rustand. As a result of this Separation Agreement, Mr. Rustand’s outstanding stock options from his grant of 200,000 stock options on September 11, 2014 were modified to accelerate the vesting date for the second tranche of options from June 30, 2015 to June 5, 2015, and the exercise period for all vested options of 133,332 was lengthened. In addition, the third tranche of options, consisting of 66,668 options, was cancelled. As a result of the modifications to the terms of the original stock options granted to Mr. Rustand, the Company recognized additional stock-based compensation expense of $737 for the year ended December 31, 2015.
Restricted Stock Awards
During the year ended December 31, 2016, the Company granted 57,964 shares of restricted stock (“RSAs”) to non-employee directors of its Board, executive officers and certain key employees. The awards primarily vest in three equal installments on the first, second and third anniversaries of the date of grant.
During the year ended December 31, 2016, the Company issued 22,793 shares of its Common Stock to non-employee directors, executive officers and key employees upon the vesting of certain RSAs granted in 2015, 2014 and 2013 under the Company’s 2006 Plan. An additional 3,307 RSAs vested during the year but were not released to the participant due to an additional holding period required by the grant agreement. As of December 31, 2016 and 2015, 10,134 shares and 6,827 shares, respectively, were vested but not released. In connection with the vesting of these RSAs, 2,736 shares of the Company’s Common Stock were surrendered to the Company by the recipients to pay their associated taxes due to the federal and state taxing authorities during 2016. These shares were placed into our treasury account.
The following table summarizes the activity of the shares and weighted-average grant date fair value of the Company’s unvested restricted Common Stock during the year ended December 31, 2016:
|
|
|
|
|
|
Weighted-average
|
|
|
|
|
|
|
|
grant date
|
|
|
|
Shares
|
|
|
fair value
|
|
|
|
|
|
|
|
|
|
|
Non-vested at beginning of period
|
|
|
44,182
|
|
|
$
|
38.67
|
|
Granted
|
|
|
57,964
|
|
|
$
|
44.90
|
|
Vested
|
|
|
(26,100
|
)
|
|
$
|
35.53
|
|
Forfeited or cancelled
|
|
|
(3,848
|
)
|
|
$
|
44.63
|
|
Non-vested at end of period
|
|
|
72,198
|
|
|
$
|
44.44
|
|
As of December 31, 2016, there was $2,220 of unrecognized compensation cost related to unvested share settled stock options and RSAs granted under the 2006 Plan. The cost is expected to be recognized over a weighted-average period of 1.37 years. The total fair value of stock options and RSAs vested was $1,383, $3,709 and $4,155 for the years ended December 31, 2016, 2015 and 2014, respectively.
Other Restricted Stock Award Grants
During the year ended December 31, 2014, the Board approved the grant of 596,915 RSAs to two individuals in connection with the Ingeus acquisition. The grants were made outside of the 2006 Plan, as they were related to the acquisition. However, since the term of the awards provided for vesting based on continued employment, the awards were accounted for as stock-based compensation. The shares necessary to settle these awards were placed in an escrow account in 2014, and were releasable from escrow in accordance with the vesting of the awards. Per the original terms of the agreements, the awards vested upon continued employment of the grantees, in four equal installments on the anniversary date of the grant. However, on October 15, 2015, the Company entered into agreements whereby the executives’ employment was terminated by mutual agreement and vesting was no longer based upon continued employment. The Company recognized $16,078 in stock-based compensation expense at the time of the modification, which otherwise would have been recognized over the remainder of the vesting period. Additionally, the Company recognized accelerated deferred compensation expense of $4,714 related to these agreements during the year ended December 31, 2015. As of December 31, 2016, 298,457 underlying shares to settle the awards are held in the escrow account, although all expense was recognized as of December 31, 2015.
Restricted Stock Units
During the year ended December 31, 2016, the Company granted 5,930 restricted stock units to a key employee, related to the terms of a separation agreement, that vested on January 3, 2017. The units will be settled through shares or cash no later than December 31, 2017. The award is liability classified, and the expense recorded is based upon the Company’s closing stock price at the end of each reporting period and the completed requisite service period.
Performance Restricted Stock Units
The Company had 49,208 performance restricted stock units (“PRSUs”) outstanding at December 31, 2016 to key employees. These awards vest upon the Company or its segments meeting certain performance criteria over a set performance period as determined, and subject to adjustment, by the Company’s Compensation Committee of the Board. 35,879 of the outstanding PRSUs at December 31, 2016 have a performance criteria tied to the Company’s return on equity (“ROE”), with performance periods ending on December 31, 2016 and 2017. The grantees will earn 33% of PRSUs granted if the ROE is 12% but less than 15%, and 100% of the PRSUs granted if the ROE is 15% or more. If ROE is less than 12%, no PRSUs will be earned. The Company does not expect any of these PRSUs, with a performance period ended December 31, 2016, to vest. 13,329 of the outstanding PRSUs at December 31, 2016 have a performance criteria tied to NET Services’ EBITDA and the Company’s EBITDA performance with performance periods ending on December 31, 2016 and 2017. The Company expects 6,665 of these PRSUs, with a performance period ended December 31, 2016, to vest. Compensation expense related to these awards totaled ($270), $613 and ($162) for the years ended December 31, 2016, 2015 and 2014, respectively.
Cash Settled Awards
During the years ended December 31, 2016, 2015 and 2014, respectively, the Company issued 3,360, 4,000 and 6,195 stock equivalent units (“SEUs”), which settle in cash upon vesting, to Coliseum Capital Partners, L.P., in lieu of a grant to Christopher Shackelton, Chairman of the Board, for his service on the Board, which vest one-third upon each anniversary of the vesting date. The fair value of the SEUs is based on the closing stock price on the last day of the period and the completed requisite service period. The Company recorded $287, $588 and $375 of expense for SEUs during the years ended December 31, 2016, 2015 and 2014, respectively.
During the year ended December 31, 2014, the Company issued 200,000 stock option equivalent units (“SOEUs”), with an exercise price of $43.81 per share, which settle in cash, to Coliseum Capital Partners, L.P in lieu of a grant to Christopher Shackelton, for other services rendered. All 200,000 SOEUs were outstanding and exercisable at December 31, 2016. This award vested one-third upon grant, one-third on June 30, 2015 and one-third on June 30, 2016. No additional SOEUs were granted during the years ended December 31, 2016 and 2015. The Company recorded ($1,517), $1,888 and $1,249 of expense for SOEUs during the years ended December 31, 2016, 2015 and 2014, respectively. The expense is included in “General and administrative expense” in the consolidated statements of income. The fair value of the SOEUs was estimated as of December 31, 2016, 2015 and 2014 using the Black-Scholes option-pricing formula and amortized over the option’s graded vesting periods with the following assumptions:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Expected dividend yield
|
|
|
0.0%
|
|
|
|
|
0.0%
|
|
|
|
|
0.0%
|
|
|
Expected stock price volatility
|
|
35.71%
|
-
|
41.82%
|
|
|
43.75%
|
-
|
45.30%
|
|
|
46.75%
|
-
|
50.1%
|
|
Risk-free interest rate
|
|
1.11%
|
-
|
1.64%
|
|
|
1.24%
|
-
|
1.70%
|
|
|
1.3%
|
-
|
1.76%
|
|
Expected life of options (in years)
|
|
1.0
|
-
|
3.0%
|
|
|
2.75
|
-
|
4.75
|
|
|
3.75
|
-
|
5.75
|
|
As of December 31, 2016 and 2015, the Company had a short-term liability of $1,764 and $3,555, respectively, in “Accrued expenses” in the consolidated balance sheet related to unexercised vested and unvested cash settled share-based payment awards. The cash settled share-based compensation expense in total excluded tax expense of $492 for the year ended December 31, 2016. The cash settled share-based compensation expense in total excluded a tax benefit of $990 and $650 for the years ended December 31, 2015 and 2014, respectively. The unrecognized compensation cost is expected to be recognized over a weighted average period of 0.78 years; however, the total expense will continue to be adjusted for the unexercised vested SOEUs until they are exercised.
Holdco Long-Term Incentive Plan
On August 6, 2015 (the “Award Date”), the Compensation Committee of the Board adopted the HoldCo LTIP under the 2006 Plan. The Holdco LTIP is designed to provide long-term performance based awards to certain executive officers of Providence. Under the program, executives will receive shares of Providence Common Stock based on the shareholder value created in excess of an 8.0% compounded annual return between the Award Date and December 31, 2017 (the “Extraordinary Shareholder Value”). The Award Date value is calculated on the basis of the Providence stock price equal to the volume weighted average of the common share price over a 90-day period ending on the Award Date. The value as of December 31, 2017 will be calculated on the basis of a similar 90-day volume weighted average common share price. A pool for use in the allocation of awards was created equal to 8.0% of the Extraordinary Shareholder Value.
Participants in the HoldCo LTIP will receive a percentage allocation of any such pool and, following determination of the size of the pool, will be entitled to a number of shares equal to their pro rata portion of the pool divided by the volume weighted average of the Company’s per share price over the 90-day period ending on December 31, 2017. Of the shares allocated, 60% will be issued to the participant on or shortly following determination of the pool, 25% will vest and be issued on the one-year anniversary of such determination date, subject to continued employment, and the remaining 15% will be issued on the second anniversary of the determination date, subject to continued employment. As of December 31, 2016, 88.5% of the award pool had been granted to executives and $3,319 and $1,353 of expense is included in “General and administrative expense” in the consolidated statements of income for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, there was $5,361 of unrecognized compensation cost related to non-vested Holdco LTIP shares granted under the 2006 Plan. The cost is expected to be recognized over a weighted-average period of 1.55 years. These awards are equity classified and the fair value of the awards was calculated using a Monte-Carlo simulation valuation model. The fair value of the awards granted in 2015 and 2016 were estimated using the following assumptions:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Forward interest rate
|
|
0.24%
|
-
|
2.71%
|
|
|
0.04%
|
-
|
2.90%
|
|
Expected Volatility
|
|
|
40.0%
|
|
|
|
|
45.0%
|
|
|
Dividend Yield
|
|
|
0.0%
|
|
|
|
|
0.0%
|
|
|
Fair Value of Total Pool
|
|
|
$12,870
|
|
|
|
|
$12,590
|
|
|
14. Vertical Long-Term Incentive Plan
The Company established Long-Term Incentive Plans (“Vertical LTIPs”) for the Company’s operating segments, or verticals, during the fourth quarter of 2015. The Vertical LTIPs are consistent in their basic terms, but each have been customized for specific aspects of the associated vertical. The awards pay in cash, however up to 50% of the award may be paid in unrestricted stock if the recipient elects this option when the Vertical LTIP offer letter is received. In addition, at the discretion of the Company, the recipients may be able to elect unrestricted stock in lieu of cash compensation at a later date. The Vertical LTIPs reward participants based on certain measures of free cash flow and EBITDA results adjusted as specified in the plan document. The awards vest in three installments: 60% of the award will pay out immediately following December 31, 2017, 25% one year following the performance period (i.e. December 31, 2018) and 15% two years following the performance period (i.e. December 31, 2019). Payout is subject to the employee remaining employed by the Company. For the years ended December 31, 2016 and 2015, $1,513 and $328 of expense, respectively, is included in “Service expense” in the consolidated statements of income related to this plan.
15. Earnings Per Share
The following table details the computation of basic and diluted earnings per share:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Providence
|
|
$
|
91,928
|
|
|
$
|
83,696
|
|
|
$
|
20,275
|
|
Less dividends on convertible preferred stock
|
|
|
(4,419
|
)
|
|
|
(3,935
|
)
|
|
|
-
|
|
Less accretion of convertible preferred stock discount
|
|
|
-
|
|
|
|
(1,071
|
)
|
|
|
-
|
|
Less income allocated to participating securities
|
|
|
(13,135
|
)
|
|
|
(10,691
|
)
|
|
|
-
|
|
Net income available to common stockholders
|
|
$
|
74,374
|
|
|
$
|
67,999
|
|
|
$
|
20,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(21,251
|
)
|
|
$
|
(29,181
|
)
|
|
$
|
24,511
|
|
Discontinued operations
|
|
|
95,625
|
|
|
|
97,180
|
|
|
|
(4,236
|
)
|
|
|
$
|
74,374
|
|
|
$
|
67,999
|
|
|
$
|
20,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per share -- weighted-average shares
|
|
|
14,666,896
|
|
|
|
15,960,905
|
|
|
|
14,765,303
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock options
|
|
|
-
|
|
|
|
-
|
|
|
|
236,538
|
|
Performance-based restricted stock units
|
|
|
-
|
|
|
|
-
|
|
|
|
16,720
|
|
Denominator for diluted earnings per share -- adjusted weighted-average shares assumed conversion
|
|
|
14,666,896
|
|
|
|
15,960,905
|
|
|
|
15,018,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(1.45
|
)
|
|
$
|
(1.83
|
)
|
|
$
|
1.66
|
|
Discontinued operations
|
|
|
6.52
|
|
|
|
6.09
|
|
|
|
(0.29
|
)
|
|
|
$
|
5.07
|
|
|
$
|
4.26
|
|
|
$
|
1.37
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
(1.45
|
)
|
|
$
|
(1.83
|
)
|
|
$
|
1.63
|
|
Discontinued operations
|
|
|
6.52
|
|
|
|
6.09
|
|
|
|
(0.28
|
)
|
|
|
$
|
5.07
|
|
|
$
|
4.26
|
|
|
$
|
1.35
|
|
The accretion of Preferred Stock discount in the table above related to a beneficial conversion feature of the Company’s Preferred Stock that was fully amortized as of June 30, 2015. Income allocated to participating securities is calculated by allocating a portion of net income less dividends on convertible stock and amortization of Preferred Stock discount to the Preferred Stock holders on a pro rata, as converted, basis; however, the convertible preferred stockholders are not required to absorb losses.
The following weighted-average shares were not included in the computation of diluted earnings per share as the effect of their inclusion would have been anti-dilutive:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Stock options to purchase common stock
|
|
|
22,638
|
|
|
|
173,925
|
|
|
|
92,054
|
|
Convertible preferred stock
|
|
|
803,442
|
|
|
|
700,241
|
|
|
|
-
|
|
16. Operating Leases
The Company has non-cancelable contractual obligations in the form of operating leases for office space, related office equipment and other facilities. The leases expire in various years and generally provide for renewal options. In the normal course of business, it is expected that these leases will be renewed or replaced by leases on other properties.
Certain operating leases provide for increases in future minimum annual rental payments based on defined increases in the Consumer Price Index, subject to certain minimum increases. Several of these lease agreements contain provisions for periods in which rent payments are reduced. The total amount of rental payments due over the lease term is being charged to rent expense on a straight-line basis over the term of the lease. The difference between rent expense recorded and the amount paid, for continuing operations, as of December 31, 2016 and 2015 was $3,253 and $2,217, respectively, and is included in “Other long-term liabilities” in the consolidated balance sheets. Also, the lease agreements generally require the Company to pay executory costs such as real estate taxes, insurance, and repairs.
Future minimum payments under non-cancelable operating leases for equipment and property with initial terms of one year or more consisted of the following at December 31, 2016:
|
|
Operating
|
|
|
|
Leases
|
|
2017
|
|
$
|
19,788
|
|
2018
|
|
|
14,422
|
|
2019
|
|
|
10,516
|
|
2020
|
|
|
7,276
|
|
2021
|
|
|
5,999
|
|
Thereafter
|
|
|
14,075
|
|
Total future minimum lease payments
|
|
$
|
72,076
|
|
Rent expense for continuing operations related to operating leases was $29,316, $31,191 and $16,117, for the years ended December 31, 2016, 2015 and 2014, respectively.
17. Retirement Plan
The Company maintains a qualified defined contribution plan under Section 401(k) of the Internal Revenue Code of 1986, as amended, for all employees of its NET Services operating segment and corporate personnel. The Company, at its discretion, may make a matching contribution to the plan. Any matching contributions vest over five years. Unvested matching contributions are forfeitable upon employee termination. Employee contributions are fully vested and non-forfeitable. The Company’s contributions to the plan for continuing operations were $248, $221 and $180, for the years ended December 31, 2016, 2015 and 2014, respectively.
WD Services’ employees are entitled to benefits under certain retirement plans. The WD Services’ segment has separate plans in each country it operates. The plans receive fixed contributions from WD Services’ companies and the legal or constructive obligation is limited to these contributions, although the benefits the employees ultimately receive are determined by the plan administrators, which includes government entities and third-party administrators. The Company’s contributions to these plans were $9,139, $10,331 and $2,424 for the years ended December 31, 2016, 2015 and 2014, respectively.
The Company also maintains a Deferred Compensation Rabbi Trust Plan for highly compensated employees of NET Services. This plan was put in place to compensate for the inability of highly compensated employees to take full advantage of the Company’s 401(k) plan. Additional information is included in Note 19,
Commitments and Contingencies
.
18. Income Taxes
The following table summarizes our U.S. and foreign income (loss) from continuing operations before income taxes:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
US
|
|
$
|
65,559
|
|
|
$
|
43,598
|
|
|
$
|
16,944
|
|
Foreign
|
|
|
(67,437
|
)
|
|
|
(53,692
|
)
|
|
|
15,856
|
|
Total
|
|
$
|
(1,878
|
)
|
|
$
|
(10,094
|
)
|
|
$
|
32,800
|
|
The federal, state and foreign income tax provision is summarized as follows:
|
|
Year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
21,202
|
|
|
$
|
15,161
|
|
|
$
|
9,534
|
|
Deferred
|
|
|
(6,477
|
)
|
|
|
(1,606
|
)
|
|
|
(2,792
|
)
|
|
|
|
14,725
|
|
|
|
13,555
|
|
|
|
6,742
|
|
State:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
4,580
|
|
|
$
|
2,644
|
|
|
$
|
2,188
|
|
Deferred
|
|
|
(938
|
)
|
|
|
(38
|
)
|
|
|
(621
|
)
|
|
|
|
3,642
|
|
|
|
2,606
|
|
|
|
1,567
|
|
Foreign:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
266
|
|
|
$
|
523
|
|
|
$
|
(616
|
)
|
Deferred
|
|
|
(1,597
|
)
|
|
|
(2,101
|
)
|
|
|
596
|
|
|
|
|
(1,331
|
)
|
|
|
(1,578
|
)
|
|
|
(20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
17,036
|
|
|
$
|
14,583
|
|
|
$
|
8,289
|
|
A reconciliation of the provision for income taxes with amounts determined by applying the statutory U.S. federal income tax rate to income (loss) from continuing operations before income taxes is as follows:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Federal statutory rates
|
|
|
35
|
%
|
|
|
35
|
%
|
|
|
35
|
%
|
Federal income tax at statutory rates
|
|
$
|
(657
|
)
|
|
$
|
(3,533
|
)
|
|
$
|
11,480
|
|
Change in valuation allowance
|
|
|
9,480
|
|
|
|
3,574
|
|
|
|
1,758
|
|
Change in uncertain tax positions
|
|
|
73
|
|
|
|
(76
|
)
|
|
|
(1,741
|
)
|
State income taxes, net of federal benefit
|
|
|
2,396
|
|
|
|
1,785
|
|
|
|
1,369
|
|
Difference between federal statutory and foreign tax rate
|
|
|
9,427
|
|
|
|
4,642
|
|
|
|
(353
|
)
|
Stock compensation
|
|
|
-
|
|
|
|
(184
|
)
|
|
|
(524
|
)
|
Meals and entertainment
|
|
|
96
|
|
|
|
81
|
|
|
|
85
|
|
Amortization of deferred consideration
|
|
|
-
|
|
|
|
9,444
|
|
|
|
1,574
|
|
Transaction costs
|
|
|
-
|
|
|
|
(447
|
)
|
|
|
1,769
|
|
Contingent consideration liability reversal
|
|
|
-
|
|
|
|
(854
|
)
|
|
|
(5,748
|
)
|
Nontaxable interest income
|
|
|
-
|
|
|
|
(965
|
)
|
|
|
(660
|
)
|
Tax credits
|
|
|
(947
|
)
|
|
|
(456
|
)
|
|
|
-
|
|
Legal expense
|
|
|
522
|
|
|
|
284
|
|
|
|
-
|
|
Depreciation
|
|
|
-
|
|
|
|
649
|
|
|
|
-
|
|
Equity in net loss of investee
|
|
|
624
|
|
|
|
366
|
|
|
|
-
|
|
Asset Impairment
|
|
|
2,353
|
|
|
|
-
|
|
|
|
-
|
|
Foreign Exchange
|
|
|
(7,001
|
)
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
670
|
|
|
|
273
|
|
|
|
(720
|
)
|
Provision for income taxes
|
|
$
|
17,036
|
|
|
$
|
14,583
|
|
|
$
|
8,289
|
|
Effective income tax rate
|
|
|
(907
|
)%
|
|
|
(144
|
)%
|
|
|
25
|
%
|
The Company recognized an income tax provision for the years ended December 31, 2016 and December 31, 2015 despite having losses from continuing operations before income taxes. Because of foreign net operating losses (including equity investee losses) for which the future income tax benefit currently cannot be recognized, and non-deductible expenses such as amortization of deferred consideration related to the Ingeus acquisition, the Company recognized estimated taxable income for these years upon which the income tax provision for financial reporting is calculated.
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company’s deferred tax assets and liabilities are as follows:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwds
|
|
$
|
17,742
|
|
|
$
|
16,889
|
|
Tax credit carryforwards
|
|
|
399
|
|
|
|
48
|
|
Accounts receivable allowance
|
|
|
1,341
|
|
|
|
355
|
|
Accrued items and reserves
|
|
|
18,669
|
|
|
|
12,955
|
|
Stock compensation
|
|
|
4,224
|
|
|
|
3,226
|
|
Deferred rent
|
|
|
915
|
|
|
|
614
|
|
Deferred financing costs
|
|
|
-
|
|
|
|
127
|
|
Other
|
|
|
180
|
|
|
|
228
|
|
|
|
|
43,470
|
|
|
|
34,442
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Deferred financing costs
|
|
|
154
|
|
|
|
-
|
|
Prepaids
|
|
|
2,103
|
|
|
|
1,181
|
|
Property and equipment depreciation
|
|
|
1,238
|
|
|
|
3,697
|
|
Goodwill and intangibles amortization
|
|
|
9,568
|
|
|
|
13,248
|
|
Equity Investment
|
|
|
59,244
|
|
|
|
-
|
|
Other
|
|
|
203
|
|
|
|
273
|
|
|
|
|
72,510
|
|
|
|
18,399
|
|
Net deferred tax assets
|
|
|
(29,040
|
)
|
|
|
16,043
|
|
Less valuation allowance
|
|
|
(27,423
|
)
|
|
|
(21,513
|
)
|
Net deferred tax assets
|
|
$
|
(56,463
|
)
|
|
$
|
(5,470
|
)
|
Current deferred tax assets, net of valuation allowance of $163 and $0 for 2016 and 2015, respectively
|
|
$
|
6,825
|
|
|
$
|
2,891
|
|
Net noncurrent deferred tax assets, net of valuation allowance of $27,260 and $21,513 for 2016 and 2015, respectively
|
|
|
4,003
|
|
|
|
42
|
|
Net noncurrent deferred tax liabilities, net of valuation allowance of $0 and $0 for 2016 and 2015, repectively
|
|
|
(67,291
|
)
|
|
|
(8,403
|
)
|
|
|
$
|
(56,463
|
)
|
|
$
|
(5,470
|
)
|
At December 31, 2016, the Company had no federal net operating loss carryforwards, and $336 of state net operating loss carryforwards which expire as follows:
2017
|
|
$
|
-
|
|
2018
|
|
|
13
|
|
2019
|
|
|
-
|
|
2020
|
|
|
-
|
|
2021
|
|
|
207
|
|
Thereafter
|
|
|
116
|
|
|
|
$
|
336
|
|
The Company had net operating loss carryforwards in the following countries which can be carried forward indefinitely
:
Australia
|
|
$
|
32,736
|
|
Canada
|
|
|
782
|
|
France
|
|
|
3,382
|
|
Poland
|
|
|
264
|
|
Sweden
|
|
|
201
|
|
UK
|
|
|
39,666
|
|
Realization of the Company’s net operating loss carryforwards is dependent on generating sufficient taxable income prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is more likely than not that all of the deferred tax assets will be realized, to the extent they are not covered by a valuation allowance. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced
.
The net change in the total valuation allowance for the year ended December 31, 2016 was $5,910, of which $9,480 related to current operations and negative $3,570 related to the adjustment of the beginning balance. The valuation allowance includes $27,127 primarily for Australia, France and UK net operating loss carryforwards, and $296 for state net operating loss and tax credit carryforwards for which the Company has concluded that it is more likely than not that these net operating loss and tax credit carryforwards will not be realized in the ordinary course of operations. The Company will continue to assess the valuation allowance
, and to the extent it is determined that the valuation allowance should be changed, an appropriate adjustment will be recorded.
The Company recognized certain excess tax benefits related to stock option plans for the years ended December 31, 2016, 2015 and 2014 in the amount of $282, $2,857 and $2,722, respectively. Such benefits were recorded as a reduction of income taxes payable and an increase in additional paid-in-capital and are included in “Exercise of employee stock options” in the accompanying statements of stockholders’ equity and comprehensive income.
The Company recognized a tax shortfall related to stock option plans for the years ended December 31, 2016, 2015 and 2014 in the amount of $558, $151 and $38, respectively. This was recorded as a reduction of deferred tax assets and a decrease to additional paid-in-capital and is included in “Exercise of employee stock options” in the accompanying statements of stockholders’ equity and comprehensive income.
The Company expects no material amount of the unrecognized tax benefits to be recognized during the next twelve months. The Company recognizes interest and penalties as a component of income tax expense. During the years ended December 31, 2016, 2015 and 2014, the Company recognized approximately $19, $27 and $14, respectively, in interest and penalties. The Company had approximately $52 and $48 for the payment of penalties and interest accrued as of December 31, 2016 and 2015, respectively. A reconciliation of the liability for unrecognized income tax benefits is as follows:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Unrecognized tax benefits, beginning of year
|
|
$
|
271
|
|
|
$
|
347
|
|
|
$
|
414
|
|
Balance upon acquisition/disposition
|
|
|
764
|
|
|
|
-
|
|
|
|
1,674
|
|
Increase (decrease) related to prior year positions
|
|
|
37
|
|
|
|
(47
|
)
|
|
|
14
|
|
Increase related to current year tax positions
|
|
|
139
|
|
|
|
48
|
|
|
|
100
|
|
Statute of limitations expiration
|
|
|
(103
|
)
|
|
|
(77
|
)
|
|
|
(1,855
|
)
|
Unrecognized tax benefits, end of year
|
|
$
|
1,108
|
|
|
$
|
271
|
|
|
$
|
347
|
|
The Company is subject to taxation in the U.S. and various foreign and state jurisdictions. The statute of limitations is generally three years for the U.S., two to five years in foreign countries and between three and four years for the various states in which the Company operates. The Company is subject to the following material taxing jurisdictions: the U.S., UK, Australia, France, Saudi Arabia and Korea. The tax years that remain open for examination by the U.S. and various foreign countries and states principally include the years 2012 to 2016.
19. Commitments and Contingencies
Legal proceedings
On June 15, 2015, a putative stockholder class action derivative complaint was filed in the Court of Chancery of the State of Delaware, (the “Court”), captioned Haverhill Retirement System v. Kerley et al., C.A. No. 11149-VCL. The complaint named Richard A. Kerley, Kristi L. Meints, Warren S. Rustand, Christopher Shackelton (the “Individual Defendants”) and Coliseum Capital Management, LLC (“Coliseum Capital Management”) as defendants, and the Company as a nominal defendant. The complaint purported to allege that the dividend rate increase term originally in the Company’s outstanding Preferred Stock was an impermissibly coercive measure that impaired the voting rights of the Company’s stockholders in connection with the vote on the removal of certain voting and conversion caps previously applicable to the Preferred Stock (the “Caps”), and that the Individual Defendants breached their fiduciary duties by approving the dividend rate increase term and attempting to coerce the stockholder vote relating to the Company’s Preferred Stock, and by failing to disclose all material information necessary to allow the Company’s stockholders to cast an informed vote on the Caps. The complaint also purported to allege derivative claims alleging that the Individual Defendants breached their fiduciary duties to the Company by entering into the subordinated note and standby agreement with Coliseum Capital Management, and granting Coliseum Capital Management certain stock options. The complaint further alleged that Coliseum Capital Management aided and abetted the Individual Defendants in breaching their fiduciary duties. The complaint sought, among other things, an injunction prohibiting the stockholder vote relating to the dividend rate increase, corporate governance reforms, unspecified damages and other relief.
On August 31, 2015, after arms’ length negotiations, the parties reached an agreement in principle and executed a Memorandum of Understanding (“MOU”) providing for the settlement of claims concerning the dividend rate increase term and stockholder vote and related disclosure. The MOU stated that the Defendants had entered into the partial settlement of the litigation solely to eliminate the distraction, burden, expense, and potential delay of further litigation involving claims that have been settled. Pursuant to the partial settlement, the Company agreed to supplement the disclosures in its definitive proxy statement on Schedule 14A (the “2015 Proxy Statement”), Coliseum Capital Management and certain of its affiliates and the Company entered into an amendment to that certain Series A Preferred Stock Exchange Agreement, by and among Coliseum Capital Partners, L.P., Coliseum Capital Partners II, L.P., Coliseum Capital Co-Invest, L.P., Blackwell Partners, LLC, and The Providence Service Corporation dated as of February 11, 2015 described in the 2015 Proxy Statement, and the Board of the Company agreed to adopt a policy related to the Board’s determination each quarter as to whether the Company should pay cash dividends or allow dividends to be paid in the form of PIK dividends on the Preferred Stock, as further described in the supplemental proxy disclosures. On September 2, 2015, Providence issued supplemental disclosures through a supplement to the 2015 Proxy Statement. On September 16, 2015, Providence stockholders approved the removal of the Caps. The Company provided notice of the proposed partial settlement to Providence’s shareholders by December 11, 2015. At a hearing on February 9, 2016, the court denied approval of the settlement. The Court indicated that plaintiff’s counsel could petition the Court for a mootness fee, and that defendants would have the opportunity to oppose any such application.
On January 12, 2016, the plaintiff filed a verified amended class action and derivative complaint (the “first amended complaint”). In addition to the defendants named in the earlier complaint, the first amended complaint named David Shackelton, Coliseum Capital Partners, L.P., Coliseum Capital Partners II, L.P., Blackwell Partners, LLC, Coliseum Capital Co-Invest, L.P. (collectively, and together with Coliseum Capital Management, LLC, “Coliseum”) and RBC Capital Markets, LLC (“RBC Capital Markets”) as additional defendants. The first amended complaint purported to allege direct and derivative claims for breach of fiduciary duty against some or all of the Individual Defendants and David Shackelton (collectively, the “Amended Individual Defendants”) regarding the approval of the subordinated note, the rights offering, the standby agreement with Coliseum Capital Management, and the grant to Coliseum Capital Management of certain stock options. The first amended complaint also purported to allege an additional derivative claim for unjust enrichment against Coliseum and further alleged that Coliseum and RBC Capital Markets aided and abetted the Amended Individual Defendants in breaching their fiduciary duties. The first amended complaint sought, among other things, revision or rescission of the terms of the subordinated note and Preferred Stock, corporate governance reforms, unspecified damages and other relief.
On May 6, 2016, the plaintiff filed a verified second amended class action and derivative complaint (the “second amended complaint”). In addition to the defendants named in the earlier complaint, the second amended complaint named Paul Hastings LLP (“Paul Hastings”) and Bank of America, N.A. (“BofA”) as additional defendants. In addition to previously asserted claims, the second amended complaint purported to assert direct and derivative claims for breach of fiduciary duties against Coliseum Capital Management, in its capacity as the controlling stockholder of the Company, in connection with the subordinated note, the Company’s rights offering of Preferred Stock and the standby purchase agreement with Coliseum Capital Management (the “Financing Transactions”). The second amended complaint also alleged that Paul Hastings breached their fiduciary duties as counsel to the Company in connection with the Financing Transactions and that BofA and Paul Hastings aided and abetted certain of the Amended Individual Defendants in breaching their fiduciary duties in connection with the Financing Transactions. The second amended complaint sought, among other things, revision or rescission of the terms of the subordinated note and Preferred Stock, corporate governance reforms, disgorgement of fees paid to RBC Capital Markets, LLC, Paul Hastings and BofA for work relating to the Financing Transactions, unspecified damages and other relief.
On May 20, 2016, the Court granted a six-month stay of the proceeding from the date of such order to allow a special litigation committee, created by the Board, sufficient time to investigate, review and evaluate the facts, circumstances and claims asserted in or relating to this action and determine the Company’s response thereto. On October 10, 2016, the Court granted an extension of the stay of the proceeding from November 20, 2016 until January 20, 2017, to allow the special litigation committee additional time to complete its investigation and review, and to determine the Company’s response thereto. On January 20, 2017, the special litigation committee advised the court that the parties to the litigation and the special litigation committee had reached an agreement in principle to settle all of the claims in the litigation. The parties are working to finalize and document the settlement, which will then be presented to the Court for approval.
The Company has indemnified the Standby Purchasers from and against any and all losses, claims, damages, expenses and liabilities relating to or arising out of (i) any breach of any representation, warranty, covenant or undertaking made by or on behalf of the Company in the Standby Purchase Agreement and (ii) the transactions contemplated by the Standby Purchase Agreement and the 14.0% Unsecured Subordinated Note in aggregate principal amount of $65,500, except to the extent that any such losses, claims, damages, expenses and liabilities are attributable to the gross negligence, willful misconduct or fraud of such Standby Purchaser.
The Company has also indemnified other third parties from and against any and all losses, claims, damages, expenses and liabilities arising out of or in connection with the Company’s acquisition of CCHN Group Holdings, Inc. (operating under the tradename Matrix, and formerly included in our HA Services segment) in October 2014 and related financing commitments, except to the extent that any such losses, claims, damages, expenses and liabilities are found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from the gross negligence, bad faith or willful misconduct of such third parties, or a material breach of such third parties’ obligations under the related agreements.
The Company recorded $1,282 and $310 of such indemnified legal expenses related to this case during the years ended December 31, 2016 and 2015, respectively, which is included in “General and administrative expenses” in the consolidated statements of income. Of these amounts, $757 and $310 for the years ended December 31, 2016 and 2015, respectively, were indemnified legal expenses of related parties. Other legal expenses of the Company related to this matter are covered under the Company’s insurance policies, subject to applicable deductibles and customary review of the expenses by the carrier. The Company recognized expense of $210 and $500 for the years ended December 31, 2016 and 2015, respectively. While the carrier typically remits payment directly to the respective law firm, the Company accrues for the cost and records a corresponding receivable for the amount to be paid by the carrier. The Company has recognized an insurance receivable of $1,645 and $2,210 in “Other receivables” in the consolidated balance sheets at December 31, 2016 and 2015, respectively, with a corresponding liability amount recorded to “Accrued expenses”.
In addition to the matter described above, in the ordinary course of business, the Company is a party to various lawsuits. Management does not expect these lawsuits to have a material impact on the liquidity, results of operations, or financial condition of Providence.
Other Indemnifications
The Company has provided certain standard indemnifications in connection with the sale of the Human Services segment to Molina Healthcare Inc. (“Molina”) effective November 1, 2015. All representations and warranties made by the Company in the Membership Interest Purchase Agreement (the “Purchase Agreement”) to sell the Human Services segment survive through the 15th month following the closing date, and ended on February 1, 2017. However, certain representations, including tax representations, survive until the expiration of applicable statutes of limitation, and healthcare representations survive until the third anniversary of the closing date. The Company has received indications from the purchaser of the Human Services segment regarding potential indemnification claims. One potential indemnification claim relates to
Rodriguez v. Providence Community Corrections,
a complaint filed in the District Court for the Middle District of Tennessee, Nashville Division (the “Rodriquez Litigation”), against Providence Community Corrections, Inc. (“PCC”), an entity sold under the Purchase Agreement. The purchaser of the Human Services segment announced in September 2016 that the parties to the Rodriguez Litigation accepted a mediation proposal for settlement pursuant to which PCC would pay the plaintiffs
$14,000, and the parties are in the process of finalizing the settlement agreement.
The outcome of any indemnification claim is uncertain but the Company believes that a significant portion of the settlement amount will be paid by PCC or PCC’s insurance carriers.
The Company has established an accrual of $6,000 with respect to an estimate of loss for potential indemnification claims related to the Company’s former Human Services segment, which is included in “Discontinued operations, net of tax” in the consolidated statements of income for the year ended December 31, 2016. It is reasonably possible losses may be incurred in excess of the $6,000 accrued, given the mediation proposal for settlement described above.
Molina has also threatened to assert other claims against the Company related to Molina’s acquisition of PCC. The Company intends to vigorously defend itself against any such claims.
Litigation is inherently uncertain and the actual losses incurred in the event that the related legal proceedings were to result in unfavorable outcomes could have a material adverse effect on the Company’s business and financial performance.
The Company has provided certain standard indemnifications in connection with its Matrix stock subscription transaction whereby Mercury Fortuna Buyer, LLC (“Subscriber”), Providence and Matrix entered into a stock subscription agreement (the “Subscription Agreement”), dated August 28, 2016. The representations and warranties made by the Company in the Subscription Agreement survive through the 15th month following the closing date; however, certain fundamental representations survive through the 36th month following the closing date. The covenants and agreements of the parties to be performed prior to the closing survive through the 15th month following the closing date, and all other covenants and agreements survive until the expiration of the applicable statute of limitations in the event of a breach, or for such lesser periods specified therein.
As of December 31, 2016, Matrix has certain malpractice claims that arose prior to the Company’s date of purchase. The Company believes it is reasonably possible that a loss has occurred; however, it is not able to reliably estimate the amount of such loss. Although the Company does not believe that the aggregate amount of liability reasonably possible with respect to these matters would have a material adverse effect on its financial results, litigation is inherently uncertain and the actual losses incurred in the event that the Company’s legal proceedings were to result in unfavorable outcomes could have a material adverse effect on the Company’s business and financial performance. The Company is not aware of any indemnification liabilities with respect to Matrix that require accrual at December 31, 2016.
Deferred Compensation Plan
The Company has one deferred compensation plan for management and highly compensated employees of NET Services as of December 31, 2016. The deferred compensation plan is unfunded, and 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 consolidated balance sheets, was $1,430 and $1,247 at December 31, 2016 and 2015, respectively.
20. Transactions with Related Parties
The Company incurred legal expenses under an indemnification agreement with the Standby Purchasers as further discussed in Note 19,
Commitments and Contingencies
. Preferred Stock dividends earned by the Standby Purchasers during the years ended December 31, 2016 and 2015 totaled $4,213 and $3,739, respectively.
The Company operates a call center in Phoenix, Arizona. The building in which the call center is located was leased to the Company from VWP McDowell, LLC (“McDowell”) until July 2014, at which time McDowell sold its interest in the property. Certain immediate family members of the then Chief Executive Officer of NET Services had a partial ownership interest in McDowell. In the aggregate these family members owned an approximate 13% interest in McDowell directly and indirectly through a trust. For 2014, the Company expensed $234 in lease payments to McDowell.
21. Discontinued Operations
Effective October 19, 2016, the Company completed the Matrix Transaction. At the Closing, (i) cash consideration of $180,614 was paid by the Subscriber to Matrix based upon an enterprise value of $537,500 and (ii) Matrix borrowed approximately $198,000 pursuant to a credit and guaranty agreement providing for term loans in an aggregate principal amount of $198,000 and revolving loan commitments in an aggregate principal amount not to exceed $10,000, which was not drawn at the Closing. At the Closing, Matrix distributed $381,163 to Providence, in full satisfaction of a promissory note and accumulated interest between Matrix and Providence. At the Closing, Providence made a $5,663 capital contribution to Matrix, as described in the Subscription Agreement, as amended, based upon its pro-rata ownership of Matrix, to fund the near-term cash needs of Matrix. On the day that was fifteen days following the Closing Date, Providence was,
to the extent payable pursuant to the terms of the Subscription Agreement, as amended, entitled to receive from Matrix, or required to pay to Matrix, subsequent working capital adjustment payments. Providence received an initial payment of $5,172 from Matrix in November 2016 which is net of the capital contribution of $5,663 described above, based upon the initial working capital calculation as described in the Subscription Agreement. Additionally, in February 2017, the Company received a $75 payment from Matrix representing the final working capital adjustment payment.
In accordance with ASC 205-20,
Presentation of Financial Statements-Discontinued Operations
, a component of an entity is reported in discontinued operations after meeting the criteria for held for sale classification if the disposition represents a strategic shift that has (or will have) a major effect on the entity's operations and financial results. The Company analyzed the quantitative and qualitative factors relevant to the Matrix stock subscription transaction resulting in the Company no longer owning a controlling interest in Matrix, and determined that those held for sale conditions for discontinued operations presentation were met during the third quarter of 2016. As such, the historical financial results of Matrix, the Company’s historical HA Services segment, and the related income tax effects have been presented as discontinued operations for all periods presented in the accompanying consolidated financial statements through October 19, 2016.
The Company has continuing involvement with Matrix through its retention of 46.8% of the equity interests in Matrix, as well as through a management consulting agreement, not to exceed ten years. Prior to the Matrix Transaction, the Company owned 100% of the equity interest in Matrix. Subsequent to the Matrix Transaction, the Company accounts for its investment in Matrix under the equity method of accounting. The Company’s 46.8% share of Matrix’s losses subsequent to the Matrix Transaction, which totaled $1,789, is recorded as “Equity in net loss of investees” in its consolidated statement of income for the year ended December 31, 2016. Matrix’s pretax loss for the period of October 19, 2016 through December 31, 2016 totaled $7,027 and includes $6,367 of transaction related expenses. There have been no cash inflows or outflows from or to Matrix subsequent to the closing of the Matrix Transaction, other than the working capital adjustments discussed above, however the Company will receive management fees associated with its ongoing relationship with Matrix, of which $185 is included in “Other receivables” in the consolidated balance sheet at December 31, 2016.
On September 3, 2015, the Company entered into a Purchase Agreement, pursuant to which the Company agreed to sell all of the membership interests in Providence Human Services, LLC and Providence Community Services, LLC, comprising the Company’s Human Services segment, in exchange for cash proceeds of approximately $200,000 prior to adjustments for estimated working capital, certain seller transaction costs, debt assumed by the buyer, and a $20,099 cash payment received for the Providence Human Services cash and cash equivalents on hand at closing. The net proceeds were $230,703, although $10,000 is held in an indemnity escrow and recorded within “Prepaid expenses and other” in the consolidated balance sheet at December 31, 2016. Proceeds include a customary working capital adjustment of $13,246. During the year ended December 31, 2016, the Company recorded additional expenses related to the Human Services segment, principally related to legal proceedings as described in Note 19,
Commitment and Contingences
, related to an indemnified legal matter.