Notes to Consolidated Financial Statements
December 31, 2017
(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”) owns subsidiaries and investments primarily engaged in the provision of healthcare services in the United States and workforce development services internationally. The subsidiaries and other investments in which the Company holds interests comprise the following segments:
|
|
|
|
•
|
Non-Emergency Transportation Services (“NET Services”) – Nationwide manager of non-emergency medical transportation (“NET”) programs for state governments and managed care organizations.
|
|
|
|
|
•
|
Workforce Development Services (“WD Services”) – Global provider of employment preparation and placement services, legal offender rehabilitation services, youth community service programs and certain health related services to eligible participants of government sponsored programs.
|
|
|
|
|
•
|
Matrix Investment – Minority interest in CCHN Group Holdings, Inc. and its subsidiaries (“Matrix”), a 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. On February 16, 2018, Matrix acquired HealthFair, expanding its service offerings to include mobile health assessments, advanced diagnostic testing, and additional care optimization services.
|
In addition to its segments’ operations, the Corporate and Other segment includes the Company’s activities at its corporate office that include executive, accounting, finance, internal audit, tax, legal, public reporting, certain strategic and corporate development functions and the results of the Company’s captive insurance company.
Discontinued Operations
During the periods presented, the Company completed the following transactions, which resulted in the presentation of the operations as Discontinued Operations. On November 1, 2015, the Company completed the sale of its Human Services segment. In addition to the results through the sale date, the Company has recorded additional expenses related to legal proceedings as described in Note 18,
Commitment and Contingencies
, related to an indemnified legal matter. 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.
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 or business management practices of these affiliates. While the Company has access to certain information and performs certain procedures to review the reasonableness of information, 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 significant 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. See Note 2,
Significant Accounting Policies and Recent Accounting Pronouncements
, for additional information on other reclassifications.
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, 2017
and
2016
,
$40,127
and
$21,411
, 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. As of December 31, 2017, cash held in foreign countries included approximately
$15,593
of proceeds from the sale of the Company's joint venture Mission Providence Pty Ltd ("Mission Providence").
Restricted Cash
At
December 31, 2017
and
2016
, the Company had
$6,296
and
$14,130
, respectively, of restricted cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
Collateral for letters of credit - Reinsured claims losses
|
$
|
—
|
|
|
$
|
2,265
|
|
|
Escrow/Trust - Reinsured claims losses
|
6,296
|
|
|
11,865
|
|
|
Restricted cash for reinsured claims losses
|
6,296
|
|
|
14,130
|
|
|
Less current portion
|
1,091
|
|
|
3,192
|
|
|
Restricted cash, less current portion
|
$
|
5,205
|
|
|
$
|
10,938
|
|
Of the restricted cash amount at
December 31, 2017
and
2016
:
|
|
|
|
•
|
$0
and
$2,265
, respectively, served as collateral for irrevocable standby letters of credit to secure any reinsured claims losses under the Company’s reinsurance program;
|
|
|
|
|
•
|
the remaining
$6,296
and
$11,865
, respectively, is primarily related to restricted cash held in trusts for reinsurance claims losses under the Company’s historical workers’ compensation, general and professional liability and auto liability reinsurance programs, as well as amounts restricted for withdrawal under our self-insured medical and benefits plans.
|
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, 2017
and
2016
, accounts receivable under these reconciliation contracts totaled
$42,054
and
$45,287
, respectively. In addition, certain government entities which WD Services serves remit payment substantially beyond the payment terms. The Company monitors these amounts due to the aging of receivables, but generally believes the balances are collectible. However, factors within those government entities could change and there can be no assurance that such changes would not result in an inability to collect the receivables.
The Company’s provision for doubtful accounts expense from continuing operations for the years ended
December 31, 2017
,
2016
and
2015
was
$1,372
,
$2,892
and
$1,369
, 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. We perform the annual goodwill impairment test for all reporting units as of October 1.
First, we perform qualitative assessments for each reporting unit to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment suggests that it is more likely than not that the fair value of a reporting unit is less than its carrying value amount, then we perform a quantitative assessment and compare the fair value of the reporting unit to its carrying value.
We adopted ASU No. 2017-04,
Intangibles-Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment
(“ASU 2017-04”) effective April 1, 2017
.
ASU 2017-04 removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step two of the goodwill impairment test. Instead, if we deem it necessary to perform the quantitative goodwill impairment test in an annual or interim period, we recognize an impairment charge equal to the excess, if any, of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.
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
no
t record any impairment charges for the year ended December 31, 2017. The Company recorded
$1,593
of impairment charges related to its Human Services segment during the year ended December 31,
2015
, which is included in "Discontinued operations, net of tax" in the consolidated statements of income.
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. The Company did not record any impairment charges for the years ended December 31, 2017 and
2015
.
Accrued Transportation Costs
Eligible members of our customers schedule transportation through the Company’s central reservation system. NET Services generally contracts with third-party providers to provide the transportation. 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
$83,588
and
$72,356
at
December 31, 2017
and
2016
, 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
$388
and
$1,070
as of
December 31, 2017
and
2016
, respectively, are included in “Prepaid expenses and other” and “Other assets”, respectively, on the consolidated balance sheet as there were no borrowings outstanding under the Company’s credit facility.
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
Capitated
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 each reconciliation period, 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 administrative management services to support the customers’ efforts to serve its clients, and 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 attains and holds employment for a specified minimum period of time. Sustainment fees are typically payable when clients maintain a job outcome past specified 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, or if the volume or types of referrals are lower than estimated, 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.
|
|
|
|
•
|
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. Forfeitures are recorded as they occur. 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.
|
|
|
|
|
•
|
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.
|
|
|
|
|
•
|
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.
|
|
|
|
|
•
|
The Company calculates the fair value of market-based stock awards, including the Company’s 2015 Holding Company LTI Program (the “HoldCo LTIP”) awards, using the Monte-Carlo simulation valuation model. Forfeitures are recorded as they occur. Compensation expense for market-based awards is recognized over the requisite service period regardless of whether the market conditions are expected to be achieved.
|
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 17,
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.
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.
On December 22, 2017, the U.S. bill commonly referred to as the Tax Cuts and Jobs Act (“Tax Reform Act”) was enacted as more fully described in Note 17,
Income Taxes.
Foreign Currency Translation
Local currencies generally are considered the functional currencies outside the U.S. 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 historically reinsured a substantial portion of its automobile, general and professional liability and workers’ compensation costs under reinsurance programs primarily through the Company’s wholly-owned subsidiary, Social Services Providers Captive Insurance Company (“SPCIC”), a licensed captive insurance company domiciled in the State of Arizona. As of May 16, 2017, SPCIC did not renew the expiring reinsurance policies. SPCIC will continue to resolve claims under the historical policy years.
The Company utilizes a report prepared by an independent actuary to estimate the gross expected losses related to historical automobile, general and professional and workers’ compensation liability reinsurance policies, including the estimated losses in excess of SPCIC’s insurance limits, which would be reimbursed to SPCIC to the extent such losses were incurred. As of
December 31, 2017
and
2016
, the Company had reserves of
$6,699
and
$11,240
, respectively, for the automobile, general and professional liability and workers’ compensation reinsurance policies, net of expected receivables for losses in excess of SPCIC’s historical insurance limits. The gross reserve as of
December 31, 2017
and
2016
of
$12,448
and
$16,505
, 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, 2017
and
2016
was
$5,749
and
$5,265
, 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 generally 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, 2017
and
2016
, the Company had
$2,229
and
$3,022
, 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 analysis 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 lag times 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 20,
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 14,
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, 2017
:
In November 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-17,
Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes
(“ASU 2015-17”), which changes how deferred taxes are classified on organizations’ balance sheets. The ASU eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The amendments apply to all organizations that present a classified balance sheet. For public companies, the amendments are effective for financial statements issued for annual periods beginning after December 16, 2016, and interim periods within those annual periods. The Company adopted ASU 2015-17 retrospectively on January 1, 2017, which resulted in the reclassification of the December 31, 2016 deferred tax assets-current balance of
$6,825
and non-current deferred tax assets of
$2,493
to long-term deferred tax liabilities in the amount of
$9,318
.
In 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 had no impact on the Company’s financial statements or disclosures.
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 in the statement of cash flows. For public companies, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted ASU 2016-09 on January 1, 2017, and elected to recognize forfeitures as they occur. As a result, the Company recorded a cumulative effect adjustment of
$850
to retained earnings as of January 1, 2017. Upon adoption, all excess tax benefits and tax deficiencies related to employee share-based payments are recognized through income tax expense prospectively.
The Company excluded the related tax benefits when applying the treasury stock method for computing diluted shares outstanding on a prospective basis resulting in a decrease in diluted weighted average shares outstanding of
4,642
shares for the year ended
December 31, 2017
.
The adoption of ASU 2016-09 subjects our tax rate to quarterly volatility from the effects of stock award exercises and vesting activities, including the adverse impact on our income tax provision for awards which result in a tax deduction less than the amount recorded for financial reporting purposes based upon the fair value of the award at the grant date. For the year ended
December 31, 2017
, the Company recorded excess tax deficiencies, net, of
$3,604
as an increase to the provision for income taxes. This deficiency primarily related to the Company's Holdco LTIP. As further explained in Note 12,
Stock-Based Compensation and Similar Arrangements
, no shares were distributed under the Company’s HoldCo LTIP as the volume weighted average of Providence’s stock price over the 90-day trading period ended on December 31, 2017 did not exceed
$56.79
. As this market condition was not satisfied, a related tax deficiency was recognized during the year ended
December 31, 2017
of
$3,590
.
The Company elected to apply the change in classification of cash flows resulting from excess tax benefits or deficiencies on a retrospective basis. This resulted in an increase in cash flows provided by operating activities of
$282
, offset by an increase of
$282
in cash flows used in financing activities in the consolidated statement of cash flows for the year ended December 31, 2016, and an increase in cash flows provided by operating activities of
$2,857
, offset by an increase of
$2,857
in cash flows used in financing activities in the consolidated statement of cash flows for the year ended December 31, 2015. Additionally, ASU 2016-09 requires that employee taxes paid when an employer withholds shares for tax-withholding purposes be reported as financing activities in the consolidated statements of cash flows, which is how the Company has historically classified these amounts.
In January 2017, the FASB issued ASU No. 2017-01,
Business Combinations (Topic 805):
Clarifying the Definition of a Business
(“ASU 2017-01”). ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. ASU 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company adopted ASU 2017-01 on April 1, 2017. The adoption of ASU 2017-01 had no impact on the Company’s financial statements or disclosures.
In January 2017, the FASB issued ASU No. 2017-03,
Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic
323)
(“ASU 2017-03”). ASU 2017-03 expands required qualitative disclosures when registrants cannot reasonably estimate the impact that adoption of an ASU will have on the financial statements. Such qualitative disclosures would include a comparison of the registrant’s new accounting policies, if determined, to current accounting policies, a description of the status of the registrant’s process to implement the new standard and a description of the significant implementation matters yet to be addressed by the registrant. The Company implemented ASU 2016-15 in its consolidated financial statements for the year ended December 31, 2017 resulting in enhanced qualitative disclosures regarding future adoption of new ASUs.
In January 2017, the FASB issued ASU No. 2017-04,
Intangibles-Goodwill and Other (Topic 350):
Simplifying the Test for Goodwill Impairment
(“ASU 2017-04”)
.
ASU 2017-04 removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step two of the goodwill impairment test. As a result, under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the impairment loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This guidance is effective prospectively for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. The Company adopted ASU 2017-04 on April 1, 2017. The adoption of ASU 2017-04 had no impact on the Company’s financial statements or disclosures.
Recent accounting pronouncements that were not yet adopted by the Company through
December 31, 2017
are as follows:
In May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers (Topic 606)
(“ASU 2014-09”)
.
ASU 2014-09 introduced FASB Accounting Standards Codification Topic 606 (“ASC 606”), which will replace most currently applicable existing revenue recognition guidance and is intended to improve and converge with international standards the financial reporting requirements for revenue from contracts with customers. The core principle of ASC 606 is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. ASC 606 also requires additional disclosures about the nature, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. ASU 2014-09 allows for adoption either on a full retrospective basis to each prior reporting period presented or on a modified retrospective basis with the cumulative effect of initially applying the new guidance recognized at the date of initial application, which is effective for the Company on January 1, 2018.
The Company has substantially completed its adoption plan, under which it performed conceptual and detailed contract reviews to determine the impact of ASC 606 on its financial statements, internal controls and operational processes. The guidance in ASC 606 on the following topics was critical to the Company’s analysis:
|
|
|
|
•
|
the effect of specified clauses on the term of many of the Company’s contracts with customers;
|
|
|
|
|
•
|
the nature of the promises in many of the Company’s contracts with customers to perform integrated services over a period of time;
|
|
|
|
|
•
|
whether and how much variable consideration to include when determining the transaction prices for its contracts with customers;
|
|
|
|
|
•
|
whether any of the Company’s customer contracts require performance over a series of distinct service periods and the impact on determining and allocating the transaction price; and
|
|
|
|
|
•
|
the manner in which the Company will measure its progress towards fully satisfying its performance obligations, including a determination of whether the Company may be able to use certain practical expedients.
|
The impact of adoption on revenue for each segment is as follows:
NET Services
–
For non-emergency transportation solutions, the Company will primarily use the right-to-invoice practical expedient to account for revenue when the Company has a right to consideration from a customer in an amount that corresponds directly with the value of the entity’s performance completed to date. This is consistent with the Company’s current revenue recognition policy. The only impact identified for NET Services is the presentation of one contract on a net basis which is currently accounted for on a gross basis, as the Company does not control the service, as defined under the new standard.
WD Services
– WD Services has a number of contracts which include variable consideration, whereby it earns revenues if certain contractually defined outcomes occur in the future. When the related performance obligations are satisfied over time, the Company will recognize revenue in the proportion that the outcome has been earned based on services provided. The amount of revenue is based upon the Company’s estimate of the final amount of outcome fees to be earned. The Company will evaluate probability using either the expected value method or the most likely amount method, as appropriate. At each reporting period, the Company will update its estimate of outcome fees, based upon actual results as well as refined estimates of future results, and will record an adjustment to revenue, based upon services performed to date. Under the new standard, the Company may recognize revenues for outcome fees earlier under the new standard, as revenue is currently recognized upon the final resolution of the contingency, i.e. the outcome is able to be invoiced. However, under certain contracts the Company receives up-front fees, which may be recognized over a longer period under the new standard as compared to current guidance. As of adoption, such impacts are not material to the consolidated financial statements.
The new standard will require the Company to recognize contract assets and liabilities on its balance sheet as appropriate. Additionally, the Company will be required to make additional disclosures about the nature of its contracts and the related performance obligations.
The Company is in its final stages of quantifying the financial impacts of the new guidance based on the contracts that exist at the date of adoption, as well as evaluating presentation of our revenues and required enhancements to disclosures. We have implemented both process and information systems changes to identify and assess contracts that are impacted by the new revenue recognition criteria and accumulate data to satisfy new disclosure requirements. As discussed above, we expect the new standard will have an immaterial impact on our consolidated financial statements, other than increased disclosures, upon adoption. Changes to revenue recognition as a result of applying the new standard will largely arise from outcome fees as described above, as well as the timing of revenue recognition for up-front fees. The Company will use the modified retrospective adoption method, and plans to adopt the standard on January 1, 2018.
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 assessing the impact of applying ASC 842 to its lease agreements. It is in the process of developing an adoption plan, assembling a cross-functional project team and assessing the impacts of applying ASC 842 to the Company’s financial statements, information systems and internal controls. 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 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 will adopt ASU 2016-15 on January 1, 2018. The adoption is not expected to have a significant impact on the Company's consolidated financial statements.
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 will adopt ASU 2016-15 on January 1, 2018. The adoption will impact the Company's consolidated statements of cash flow as the Company has restricted cash totaling
$6,296
at December 31, 2017. Additionally, the Company will be required to make additional disclosures detailing the balance sheet line items that are included in the sum of cash, cash equivalents and restricted cash in the consolidated statements of cash flow.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation–Stock Compensation (Topic 718):
Scope of Modification Accounting
(“ASU 2017-09”). ASU 2017-09 provides guidance about which changes to the terms of a share-based payment award
should be accounted for as a modification. A change to an award should be accounted for as a modification unless the fair value of the modified award is the same as the original award, the vesting conditions do not change, and the classification as an equity or liability instrument does not change. This guidance is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted. The Company will adopt ASU 2016-15 on January 1, 2018. The adoption of ASU 2017-09 is not expected to have a material impact on the Company’s consolidated financial statements.
3. Equity Investment
Matrix
Prior to the closing of the Matrix Transaction on October 19, 2016, the financial results of Matrix were included in the Company’s HA Services segment. Subsequent to the closing of the Matrix Transaction, the Company owned a
46.8%
noncontrolling interest in Matrix. As of
December 31, 2017
, the Company owned a
46.6%
noncontrolling interest in Matrix. Pursuant to a Shareholder’s Agreement, affiliates of Frazier Healthcare Partners hold rights necessary to control the fundamental operations of Matrix. The Company accounts for this investment in Matrix under the equity method of accounting and the Company’s share of Matrix’s income or losses are recorded as “Equity in net (gain) loss of investees” in the accompanying consolidated statements of income.
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, 2017
and
2016
totaled
$169,699
and
$157,202
, respectively.
Summary financial information for Matrix on a standalone basis is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
Current assets
|
$
|
37,563
|
|
|
$
|
28,589
|
|
|
Long-term assets
|
597,613
|
|
|
614,841
|
|
|
Current liabilities
|
27,718
|
|
|
25,791
|
|
|
Long-term liabilities
|
240,513
|
|
|
281,348
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended December 31, 2017
|
|
October 19, 2016
through
December 31, 2016
|
|
Revenue
|
$
|
227,872
|
|
|
$
|
41,635
|
|
|
Operating income (loss)
|
11,870
|
|
|
(4,079
|
)
|
|
Net income (loss)
|
26,665
|
|
|
(4,200
|
)
|
Included in Matrix’s standalone net income of
$26,665
for the year ended
December 31, 2017
is depreciation and amortization of
$33,512
, transaction related expenses of
$3,537
, which includes
$2,679
of transaction incentive compensation, equity compensation of
$2,639
, management fees paid to Matrix’s shareholders of
$2,331
, merger and acquisition due diligence related costs of
$685
, interest expense of
$14,818
and an income tax benefit of
$29,613
. The income tax benefit primarily related to the re-measurement of deferred tax liabilities arising from a lower U.S. corporate tax rate as a result of the Tax Reform Act. Included in Matrix’s standalone net loss of
$4,200
for the year ended
December 31, 2016
is depreciation and amortization of
$6,356
, transaction related expenses of
$6,367
, which includes
$4,033
of transaction incentive compensation, equity compensation of
$407
, management fees paid to Matrix’s shareholders of
$396
, interest expense of
$2,949
and an income tax benefit of
$2,828
.
See Note 20,
Discontinued Operations
, for Matrix’s January 1, 2016 through October 19, 2016 results of operations, as well as the results of operations for the year ended December 31, 2015.
Mission Providence
The Company entered into a joint venture agreement in November 2014 with Mission Australia ACN (“Mission Australia”) to form Mission Providence. Mission Providence delivers employment preparation and placement services in Australia. The
Company had a
60%
ownership interest in Mission Providence, and had rights to
75%
of Mission Providence’s distributions of cash or profit surplus twice per calendar year. The Company accounted for this investment under the equity method of accounting and the Company’s share of Mission Providence’s income or losses was recorded as “Equity in net (gain) 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 “Purchase of equity investments”.
On September 29, 2017, the Company and Mission Australia completed the sale of
100%
of the stock of Mission Providence pursuant to a share sale agreement. Upon the sale of Mission Providence, the Company received AUD
20,184
, or
$15,823
of proceeds, for its equity interest, net of transaction fees. Subsequently, a working capital adjustment was finalized in December 2017 resulting in the return of
$229
of the proceeds. The related gain on sale of Mission Providence totaling
$12,377
is recorded as “Gain on sale of equity investment” in the accompanying consolidated statements of income. The carrying amount of the assets included in the Company’s consolidated balance sheet related to the Company’s interest in Mission Providence was
$4,021
at December 31, 2016.
Summary financial information for Mission Providence on a standalone basis is as follows:
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Current assets
|
$
|
4,640
|
|
|
Long-term assets
|
10,473
|
|
|
Current liabilities
|
12,844
|
|
|
Long-term liabilities
|
1,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2017
|
|
Twelve months ended December 31, 2016
|
|
Revenue
|
$
|
30,125
|
|
|
$
|
36,546
|
|
|
Operating loss
|
(1,765
|
)
|
|
(9,664
|
)
|
|
Net loss
|
(1,934
|
)
|
|
(8,843
|
)
|
4. Prepaid Expenses and Other
Prepaid expenses and other were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
Prepaid income taxes
|
$
|
1,106
|
|
|
$
|
1,467
|
|
|
Escrow funds
|
10,000
|
|
|
10,000
|
|
|
Prepaid insurance
|
2,121
|
|
|
3,153
|
|
|
Prepaid taxes and licenses
|
906
|
|
|
3,570
|
|
|
Note receivable
|
3,224
|
|
|
3,130
|
|
|
Prepaid rent
|
2,268
|
|
|
2,013
|
|
|
Deposits held for leased premises and bonds
|
2,849
|
|
|
2,609
|
|
|
Other
|
12,769
|
|
|
11,953
|
|
|
Total prepaid expenses and other
|
$
|
35,243
|
|
|
$
|
37,895
|
|
Escrow funds represent amounts related to indemnification claims from the sale of the Human Services segment, which was completed on November 1, 2015. The Company has accrued
$15,000
as a contingent liability for the settlement of potential indemnification claims, which is included in “Accrued expenses” in the consolidated balance sheet as of
December 31, 2017
. The escrow funds will be used to satisfy a portion of this settlement. See Note 18,
Commitments and Contingencies
, for further information.
5. Property and Equipment
Property and equipment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated
Useful
|
|
December 31,
|
|
|
Life (years)
|
|
2017
|
|
2016
|
|
Computer and telecom equipment
|
3
|
|
—
|
|
5
|
|
$
|
35,915
|
|
|
$
|
31,854
|
|
|
Software
|
3
|
|
—
|
|
5
|
|
32,989
|
|
|
26,883
|
|
|
Leasehold improvements
|
Shorter of 7 years or
lease term
|
|
17,890
|
|
|
16,720
|
|
|
Furniture and fixtures
|
5
|
|
—
|
|
10
|
|
6,416
|
|
|
8,070
|
|
|
Automobiles
|
|
|
5
|
|
|
|
3,797
|
|
|
3,597
|
|
|
Construction and development in progress
|
|
|
N/A
|
|
|
|
13,384
|
|
|
5,831
|
|
|
|
|
|
|
|
|
|
110,391
|
|
|
92,955
|
|
|
Less accumulated depreciation
|
|
|
|
|
|
|
60,014
|
|
|
46,735
|
|
|
Total property and equipment, net
|
|
|
|
|
|
|
$
|
50,377
|
|
|
$
|
46,220
|
|
Depreciation expense from continuing operations was
$18,542
,
$18,038
and
$14,488
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
The Company sold the building and land that included holding company office space in Arizona effective December 31, 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
for the year ended December 31, 2016 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. Construction in progress as of December 31, 2017 is primarily comprised of NET Services, which has incurred substantial software development costs for its LCAD NextGen technology system. Such amounts are expected to be placed into service during 2018.
6. Goodwill and Intangibles
Impairment
The Company did
no
t record any impairment charges for the year ended
December 31, 2017
. 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 during the year ended December 31, 2016. The Company recorded
$1,593
of impairment charges related to its Human Services segment during the year ended December 31,
2015
, which is included in “Discontinued operations, net of tax” in the consolidated statements of income.
Goodwill
Changes in goodwill were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
Services
|
|
WD
Services
|
|
Consolidated
Total
|
|
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
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustment
|
—
|
|
|
2,044
|
|
|
2,044
|
|
|
Balances at December 31, 2017
|
|
|
|
|
|
|
Goodwill
|
191,215
|
|
|
37,718
|
|
|
228,933
|
|
|
Accumulated impairment losses
|
(96,000
|
)
|
|
(11,265
|
)
|
|
(107,265
|
)
|
|
|
$
|
95,215
|
|
|
$
|
26,453
|
|
|
$
|
121,668
|
|
The total amount of goodwill that was deductible for income tax purposes related to acquisitions as of
December 31, 2017
and
2016
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,
|
|
|
|
|
2017
|
|
2016
|
|
|
Estimated
Useful
Life (Yrs)
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Customer relationships
|
15
|
|
$
|
48,128
|
|
|
$
|
(33,136
|
)
|
|
$
|
48,020
|
|
|
$
|
(29,941
|
)
|
|
Customer relationships
|
10
|
|
30,583
|
|
|
(11,871
|
)
|
|
27,915
|
|
|
(8,147
|
)
|
|
Trademarks and Trade Names
|
10
|
|
14,525
|
|
|
(5,205
|
)
|
|
13,282
|
|
|
(3,431
|
)
|
|
Developed technology
|
5
|
|
3,228
|
|
|
(2,313
|
)
|
|
2,951
|
|
|
(1,525
|
)
|
|
Total
|
|
|
$
|
96,464
|
|
|
$
|
(52,525
|
)
|
|
$
|
92,168
|
|
|
$
|
(43,044
|
)
|
The gross carrying amount as of
December 31, 2017
and
2016
includes the asset impairment charge of
$4,381
to definite-lived customer relationship intangible assets of WD Services recorded during the year ended December 31, 2016. The weighted-average amortization period at
December 31, 2017
for intangibles was
12.3
years.
No
significant residual value is estimated for these intangible assets. Amortization expense from continuing operations was
$7,927
,
$8,566
and
$9,510
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
The total amortization expense is estimated to be as follows for the next five years and thereafter as of
December 31, 2017
based upon the applicable foreign exchange rates as of
December 31, 2017
:
|
|
|
|
|
|
|
|
|
Year
|
|
Amount
|
|
2018
|
|
$
|
8,126
|
|
|
2019
|
|
7,749
|
|
|
2020
|
|
7,473
|
|
|
2021
|
|
7,387
|
|
|
2022
|
|
7,025
|
|
|
Thereafter
|
|
6,179
|
|
|
Total
|
|
$
|
43,939
|
|
7. Accrued Expenses
Accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
Accrued compensation and related
|
$
|
33,653
|
|
|
$
|
23,050
|
|
|
NET Services accrued contract payments
|
17,487
|
|
|
32,836
|
|
|
Accrued settlement
|
15,000
|
|
|
6,000
|
|
|
Income taxes payable
|
3,723
|
|
|
372
|
|
|
Other
|
33,975
|
|
|
40,123
|
|
|
Total accrued expenses
|
$
|
103,838
|
|
|
$
|
102,381
|
|
8. Restructuring, Redundancy
and Related Reorganization Costs
WD Services has
two
active redundancy programs at
December 31, 2017
. During the year ended
December 31, 2017
, WD Services had
four
redundancy programs. Of these
four
redundancy plans,
two
were approved in 2015 and have been completed; a plan related to the termination of employees delivering services under an offender rehabilitation program (“Offender Rehabilitation Program”) and a plan related to the termination of employees delivering services under the Company’s employability and skills training programs and certain other employees in the United Kingdom (“UK Restructuring Program”). In addition, a redundancy plan related to the termination of employees as part of a value enhancement project (“Ingeus Futures’ Program”) to better align costs with revenue for certain contracts in the UK and to improve overall operating performance was approved in 2016 and a further redundancy program to align costs with revenue for offender rehabilitation services (“Delivery First Program”) was approved in the fourth quarter of 2017. The Company recorded severance and related charges of
$2,577
and
$8,511
during the years ended
December 31, 2017
and
2016
, 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 estimates of severance and related charges for the plans were based upon the employee groups impacted, average salary and benefits, and redundancy benefits pursuant to the existing policies. Additional charges above the initial estimates were incurred for the redundancy plans related to the actualization of termination benefits for specifically identified employees impacted under these plans, 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. In addition, additional phases of value enhancement projects may be undertaken in the future, if costs and revenue are not aligned.
Summary of Severance and Related Charges
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
2017
|
|
Costs
Incurred
|
|
Cash Payments
|
|
Foreign Exchange
Rate Adjustments
|
|
December 31, 2017
|
|
Ingeus Futures' Program
|
$
|
2,486
|
|
|
$
|
1,223
|
|
|
$
|
(3,386
|
)
|
|
$
|
159
|
|
|
$
|
482
|
|
|
Offender Rehabilitation Program
|
1,380
|
|
|
(40
|
)
|
|
(1,357
|
)
|
|
17
|
|
|
—
|
|
|
UK Restructuring Program
|
50
|
|
|
(53
|
)
|
|
—
|
|
|
3
|
|
|
—
|
|
|
Delivery First Program
|
—
|
|
|
1,447
|
|
|
(184
|
)
|
|
24
|
|
|
1,287
|
|
|
Total
|
$
|
3,916
|
|
|
$
|
2,577
|
|
|
$
|
(4,927
|
)
|
|
$
|
203
|
|
|
$
|
1,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
2016
|
|
Costs
Incurred
|
|
Cash Payments
|
|
Foreign Exchange
Rate Adjustments
|
|
December 31, 2016
|
|
Ingeus Futures' Program
|
$
|
—
|
|
|
$
|
2,515
|
|
|
$
|
—
|
|
|
$
|
(29
|
)
|
|
$
|
2,486
|
|
|
Offender Rehabilitation Program
|
6,538
|
|
|
4,865
|
|
|
(8,924
|
)
|
|
(1,099
|
)
|
|
1,380
|
|
|
UK Restructuring Program
|
2,059
|
|
|
1,131
|
|
|
(3,031
|
)
|
|
(109
|
)
|
|
50
|
|
|
Total
|
$
|
8,597
|
|
|
$
|
8,511
|
|
|
$
|
(11,955
|
)
|
|
$
|
(1,237
|
)
|
|
$
|
3,916
|
|
The total of accrued severance and related costs of
$1,769
and
$3,916
are reflected in “Accrued expenses” in the consolidated balance sheets at
December 31, 2017
and
2016
, respectively. The amount accrued as of
December 31, 2017
for the Ingeus Futures’ Program and Delivery First Program is expected to be settled principally during 2018.
9. Long-Term Obligations
The Company’s long-term obligations were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2017
|
|
December 31,
2016
|
|
|
|
|
|
|
$200,000 revolving loan, LIBOR plus 2.25% - 3.25% with interest payable at least once every three months through August 2018
|
$
|
—
|
|
|
$
|
—
|
|
|
Capital lease obligations
|
2,984
|
|
|
3,611
|
|
|
|
2,984
|
|
|
3,611
|
|
|
Less current portion of capital lease obligations
|
2,400
|
|
|
1,721
|
|
|
Total long-term obligations, less current portion
|
$
|
584
|
|
|
$
|
1,890
|
|
Annual maturities of capital lease obligations as of
December 31, 2017
are as follows:
|
|
|
|
|
|
|
|
|
Year
|
|
Amount
|
|
2018
|
|
$
|
2,400
|
|
|
2019
|
|
504
|
|
|
2020
|
|
80
|
|
|
Total
|
|
$
|
2,984
|
|
Credit Facility
The Company is a party to the amended and restated credit and guaranty agreement, dated as of August 2, 2013 (as amended, the “Credit Agreement”), with Bank of America, N.A., as administrative agent, swing line lender and letter of credit issuer, and the other lenders party thereto. The Credit Agreement provides the Company with a
$200,000
revolving credit facility (the “Credit Facility”), including a sub-facility of
$25,000
for letters of credit. As of
December 31, 2017
, the Company had no borrowings and seven letters of credit in the amount of
$11,074
outstanding under the revolving credit facility. At
December 31, 2017
, the Company’s available credit under the revolving credit facility was
$188,926
. Under the Credit Agreement, the Company has an option to request an increase in the amount of the revolving credit 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 increase option as no lender is obligated to participate in any such increase under the Credit Facility. The Credit Facility matures on August 2, 2018.
Interest on the outstanding principal amount of 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 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 captive. 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 captive, and
65%
of the issued and outstanding stock of the Company’s first tier foreign subsidiaries.
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
seven
capital leases for information technology hardware and software with termination dates ranging from January 2018 through October 2020. The terms of the leases are between
12
and
36 months
, with interest recorded at an incremental borrowing rate of
3.28%
. At
December 31, 2017
,
$6,045
represents equipment under capital leases and
$1,642
represents accumulated depreciation recognized on this leased equipment.
10. 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 payment 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, 2017
,
1,800
shares of Preferred Stock have been converted to
4,510
shares of Common Stock.
Cash dividends are payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year, and 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 on redeemable convertible preferred stock totaling
$4,418
, or
$5.50
per share,
$4,419
, or
$5.50
per share, and
$3,928
, or
$4.88
per share, were distributed to convertible preferred stockholders for the years ended
December 31, 2017
,
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, 2017
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
Dollar Value
|
|
Share Count
|
|
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
|
|
|
Conversion to common stock
|
(20
|
)
|
|
(198
|
)
|
|
Allocation of issuance costs
|
1
|
|
|
—
|
|
|
Balance at December 31, 2017
|
$
|
77,546
|
|
|
803,200
|
|
As of
December 31, 2017
and
2016
, the outstanding shares of Preferred Stock were convertible into
2,014,042
and
2,014,538
shares of Common Stock, respectively.
11. Stockholders’ Equity
At
December 31, 2017
and
2016
there were
17,473,598
and
17,315,661
shares of the Company’s Common Stock issued, respectively, including
4,126,132
and
3,478,676
treasury shares at
December 31, 2017
and
2016
, 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.
The following table reflects the total number of shares of the Company’s Common Stock reserved for future issuance as of
December 31, 2017
:
|
|
|
|
|
|
|
Shares of common stock reserved for:
|
|
|
Exercise of stock options and restricted stock awards
|
681,608
|
|
|
Conversion of preferred stock to common stock
|
2,014,042
|
|
|
Issuance of Performance Restricted Stock Units
|
18,122
|
|
|
Total shares of common stock reserved for future issuance
|
2,713,772
|
|
Share Repurchases
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. Through October 26, 2017, a total of
770,808
shares were purchased through this plan for
$30,360
, excluding commission payments.
On November 2, 2017, the Board approved the extension of the Company’s October 26, 2016 stock repurchase program, authorizing the Company to engage in a repurchase program to repurchase up to
$69,640
(the amount remaining from the
$100,000
repurchase amount authorized in 2016) in aggregate value of our Common Stock through December 31, 2018. As of
December 31, 2017
,
180,270
shares were purchased under this plan after it was extended on November 2, 2017 for
$10,503
, excluding commission payments.
During the years ended
December 31, 2017
,
2016
and
2015
, the Company withheld
19,556
,
2,736
and
15,961
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, during the years ended
December 31, 2017
and
2015
, the Company withheld
5,665
and
5,718
shares, respectively, from employees to cover the settlement of income tax and related benefit withholding obligations and the exercise price upon the exercise of stock options. During the year ended December 31, 2015, the Company withheld
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.
12. 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, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of shares
of the Company's Common Stock authorized for
|
|
Number of shares
of the Company's
Common Stock remaining for
|
|
Number of shares of the Company's Common Stock subject to
|
|
|
issuance
|
|
future grants
|
|
Stock Options
|
|
Stock Grants
|
|
2006 Plan
|
5,400,000
|
|
|
1,938,666
|
|
|
606,695
|
|
|
111,157
|
|
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, 2017
,
2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
Service expense
|
$
|
491
|
|
|
$
|
830
|
|
|
$
|
21,480
|
|
|
General and administrative expense
|
7,052
|
|
|
4,324
|
|
|
5,027
|
|
|
Equity in net (gain) loss of investees
|
76
|
|
|
18
|
|
|
—
|
|
|
Discontinued operations, net of tax
|
—
|
|
|
(18
|
)
|
|
115
|
|
|
Total stock-based compensation
|
$
|
7,619
|
|
|
$
|
5,154
|
|
|
$
|
26,622
|
|
Stock-based compensation included in service expense is related to the following segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
NET Services
|
$
|
434
|
|
|
$
|
841
|
|
|
$
|
724
|
|
|
WD Services (a)
|
57
|
|
|
(11
|
)
|
|
20,756
|
|
|
Total stock-based compensation in service expense
|
$
|
491
|
|
|
$
|
830
|
|
|
$
|
21,480
|
|
|
|
|
|
(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 tax benefits of
$2,885
,
$2,072
and
$2,322
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
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 for the years ended December 31, 2017 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2015
|
|
Expected dividend yield
|
0.0%
|
|
0.0%
|
|
Expected stock price volatility
|
19.45%
|
—
|
42.95%
|
|
33.8%
|
—
|
46.14%
|
|
Risk-free interest rate
|
0.95%
|
—
|
2.23%
|
|
0.4%
|
—
|
1.35%
|
|
Expected life of options (years)
|
0.03
|
—
|
6.50
|
|
0.03
|
—
|
4.00
|
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 stock price volatility was based on the Company’s historical data. The expected
lives of options were based on the Company’s historical data, a simplified method for plain vanilla options, or the Company’s best estimate where appropriate.
During the fourth quarter of 2017, James Lindstrom resigned from the Company as Chief Executive Officer ("CEO") and board member of the Company. As a result of Mr. Lindstrom's resignation as CEO, a separation agreement was entered into between the Company and Mr. Lindstrom. As a result of this separation agreement, Mr. Lindstrom was granted
125,000
stock options with an exercise price of
$61.33
per share that were immediately vested. The options are exercisable through December 31, 2018.
During the year ended
December 31, 2017
, the Company issued
91,400
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, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2017
|
|
|
Number
of Shares
Under
Option
|
|
Weighted-
average
Exercise
Price
|
|
Weighted-
average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
Balance at beginning of period
|
355,598
|
|
|
$
|
33.48
|
|
|
|
|
|
|
|
Granted
|
371,775
|
|
|
57.08
|
|
|
|
|
|
|
Exercised
|
(115,825
|
)
|
|
29.77
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
(854
|
)
|
|
46.44
|
|
|
|
|
|
|
|
Expired
|
(3,999
|
)
|
|
24.59
|
|
|
|
|
|
|
|
Outstanding at end of period
|
606,695
|
|
|
$
|
48.70
|
|
|
2.62
|
|
$
|
6,705
|
|
|
Vested or expected to vest at end of period
|
606,695
|
|
|
$
|
48.70
|
|
|
2.62
|
|
$
|
6,705
|
|
|
Exercisable at end of period
|
357,984
|
|
|
$
|
44.65
|
|
|
2.10
|
|
$
|
5,508
|
|
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, 2017
,
2016
and
2015
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
Weighted-average grant date fair value per share
|
$
|
9.05
|
|
|
$
|
—
|
|
|
$
|
8.77
|
|
|
Options exercised:
|
|
|
|
|
|
|
Total intrinsic value
|
$
|
2,010
|
|
|
$
|
979
|
|
|
$
|
6,659
|
|
|
Cash received
|
$
|
1,921
|
|
|
$
|
4,108
|
|
|
$
|
4,894
|
|
Stock Option Modifications
During the fourth quarter of 2017, as a result of the separation agreement between the Company and Mr. Lindstrom, Mr. Lindstrom's outstanding stock options from his grants of
11,319
on August 6, 2015 and
9,798
on March 15, 2017 were modified to accelerate the vesting date of both awards to November 15, 2017 and allow exercise of the stock options until December 31, 2018. As a result of the modification to the terms of the original stock options granted to Mr. Lindstrom, the Company recognized an accelerated expense of
$83
on the award for the year ended December 31, 2017.
During the second quarter of 2015, Warren Rustand terminated his role as 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, 2017
, the Company granted
33,420
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, 2017
, the Company issued
36,623
shares of its Common Stock to non-employee directors, executive officers and key employees upon the vesting of certain RSAs granted in
2016
,
2015
and
2014
under the Company’s 2006 Plan. As of
December 31, 2017
and
2016
,
10,134
shares were vested but not released due to an additional holding period required by the grant agreement.
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, 2017
:
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted-average
grant date
fair value
|
|
|
|
|
|
|
Non-vested at beginning of period
|
72,198
|
|
|
$
|
44.44
|
|
|
Granted
|
33,420
|
|
|
$
|
43.91
|
|
|
Vested
|
(36,623
|
)
|
|
$
|
43.42
|
|
|
Forfeited or cancelled
|
(4,216
|
)
|
|
$
|
47.17
|
|
|
Non-vested at end of period
|
64,779
|
|
|
$
|
44.82
|
|
As of
December 31, 2017
, there was
$4,331
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
1.2
years. The total fair value of stock options and RSAs vested was
$3,550
,
$1,383
and
$3,709
for the years ended
December 31, 2017
,
2016
and
2015
, 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, 2017
,
149,228
underlying shares to settle the awards are held in the escrow account and will be released in 2018, 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 were settled through a cash payment of
$304
during the year ended December 31, 2017. The award was liability classified, and the expense recorded was 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
18,122
performance restricted stock units (“PRSUs”) outstanding at
December 31, 2017
. 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.
13,262
of the outstanding PRSUs at
December 31, 2017
have a performance criteria tied to the Company’s return on equity (“ROE”), with performance periods ending on
December 31, 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 has determined, subsequent to December 31, 2017, that none of these PRSUs, with a performance period ended
December 31, 2017
, will vest.
4,860
of the outstanding PRSUs at
December 31, 2017
have a performance criteria tied to NET Services’ EBITDA and the Company’s EBITDA performance with performance periods ending on
December 31, 2017
. The Company expects all of these PRSUs, with a performance period ended
December 31, 2017
, to vest. Compensation expense (benefit) related to these awards totaled
$19
,
($270)
and
$613
for the years ended
December 31, 2017
,
2016
and
2015
, respectively.
Cash Settled Awards
During the years ended
December 31, 2017
,
2016
and
2015
, respectively, the Company issued
3,097
,
3,360
and
4,000
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
$235
,
$287
and
$588
of expense for SEUs during the years ended
December 31, 2017
,
2016
and
2015
, 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, 2017
. 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, 2017
,
2016
and 2015. The Company recorded
$2,146
and
$1,888
of expense for SOEUs during the years ended
December 31, 2017
and
2015
, respectively, and a benefit of
$1,517
during the year ended December 31, 2016. The expenses and benefit are included in “General and administrative expense” in the consolidated statements of income. The fair value of the SOEUs was estimated as of
December 31, 2017
,
2016
and
2015
using the Black-Scholes option-pricing formula and amortized over the option’s graded vesting periods with the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
Expected dividend yield
|
0.0%
|
|
0.0%
|
|
0.0%
|
|
Expected stock price volatility
|
23.36%
|
—
|
32.09%
|
|
35.71%
|
—
|
41.82%
|
|
43.75%
|
—
|
45.3%
|
|
Risk-free interest rate
|
1.75%
|
—
|
1.95%
|
|
1.11%
|
—
|
1.64%
|
|
1.2%
|
—
|
1.70%
|
|
Expected life of options (in years)
|
0.75
|
—
|
2.75
|
|
1.0
|
—
|
3.00
|
|
2.75
|
—
|
4.75
|
As of
December 31, 2017
and
2016
, the Company had a short-term liability of
$3,938
and
$1,764
, 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 benefit 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
$908
and
$990
for the years ended
December 31, 2017
and 2015. The unrecognized compensation cost for SEUs is expected to be recognized over a weighted average period of
0.8
years; however, the total expense for both SEUs and SOEUs will continue to be adjusted until the awards are settled.
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 was designed to provide long-term performance based awards to certain executive officers of Providence. Under the program, executives would 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 was calculated on the basis of the Providence stock price equal to the volume weighted average of the common share price over the
90
-day trading period ending on the Award Date. The Extraordinary Shareholder Value was calculated on the basis of the Providence stock price equal to the volume weighted average of the common share price
over the 90-day trading period ending on December 31, 2017. 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 would receive a percentage allocation of any such pool and, following determination of the size of the pool, would 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 trading period ending on December 31, 2017. Of the shares allocated,
60%
would be issued to the participant on or shortly following determination of the pool,
25%
would vest and be issued on the one-year anniversary of such determination date, subject to continued employment, and the remaining
15%
would be issued on the second anniversary of the determination date, subject to continued employment.
It was determined that no shares would be distributed under the Holdco LTIP as the calculation of the pool amount was zero.
$4,738
,
$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, 2017
,
2016
and
2015
, respectively. As of
December 31, 2017
, the Company accelerated all remaining unrecognized compensation expense for the Holdco LTIP as there was no further requisite service period associated with the award, resulting in an acceleration of expense of
$1,053
.
These awards were 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
2016
and
2015
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
|
—%
|
|
—%
|
|
Fair Value of Total Pool
|
$12,870
|
|
$12,590
|
13. 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 were 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 participant remaining employed by the Company.
During 2017, the Company revised the structure of the NET Services long-term incentive plan. As a result, the Company finalized the amount payable under the plan at
$2,956
. The total value will be paid to the awarded participants per the terms of the original agreement and thus the remaining unamortized expense relating to this plan continues to be recognized over the remaining service period. As of
December 31, 2017
, unamortized compensation expense is
$299
. For the years ended
December 31, 2017
,
2016
, and 2015,
$816
,
$1,513
and
$328
of expense, respectively, is included in “Service expense” in the consolidated statements of income related to this plan. At
December 31, 2017
, the liability for long-term incentive plans of the Company’s operating segments of
$2,657
is reflected in “Accrued expenses” and “Other long-term liabilities” in the consolidated balance sheet. At
December 31, 2016
, the liability for long-term incentive plans of the Company’s operating segments of
$1,841
is reflected in “Other long-term liabilities” in the consolidated balance sheet.
14. Earnings Per Share
The following table details the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
Numerator:
|
|
|
|
|
|
|
Net income attributable to Providence
|
$
|
53,369
|
|
|
$
|
91,928
|
|
|
$
|
83,696
|
|
|
Less dividends on convertible preferred stock
|
(4,419
|
)
|
|
(4,419
|
)
|
|
(3,935
|
)
|
|
Less accretion of convertible preferred stock discount
|
—
|
|
|
—
|
|
|
(1,071
|
)
|
|
Less income allocated to participating securities
|
(7,085
|
)
|
|
(13,135
|
)
|
|
(10,691
|
)
|
|
Net income available to common stockholders
|
$
|
41,865
|
|
|
$
|
74,374
|
|
|
$
|
67,999
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
$
|
47,848
|
|
|
$
|
(21,251
|
)
|
|
$
|
(29,181
|
)
|
|
Discontinued operations
|
(5,983
|
)
|
|
95,625
|
|
|
97,180
|
|
|
|
$
|
41,865
|
|
|
$
|
74,374
|
|
|
$
|
67,999
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
Denominator for basic earnings per share -- weighted-average shares
|
13,602,140
|
|
|
14,666,896
|
|
|
15,960,905
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Common stock options
|
66,314
|
|
|
—
|
|
|
—
|
|
|
Performance-based restricted stock units
|
4,860
|
|
|
—
|
|
|
—
|
|
|
Denominator for diluted earnings per share -- adjusted weighted-average shares assumed conversion
|
13,673,314
|
|
|
14,666,896
|
|
|
15,960,905
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
Continuing operations
|
$
|
3.52
|
|
|
$
|
(1.45
|
)
|
|
$
|
(1.83
|
)
|
|
Discontinued operations
|
(0.44
|
)
|
|
6.52
|
|
|
6.09
|
|
|
|
$
|
3.08
|
|
|
$
|
5.07
|
|
|
$
|
4.26
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
Continuing operations
|
$
|
3.50
|
|
|
$
|
(1.45
|
)
|
|
$
|
(1.83
|
)
|
|
Discontinued operations
|
(0.44
|
)
|
|
6.52
|
|
|
6.09
|
|
|
|
$
|
3.06
|
|
|
$
|
5.07
|
|
|
$
|
4.26
|
|
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 attributable to Providence, less dividends on convertible stock, to the convertible preferred stockholders on a pro-rata as converted basis; however, the convertible preferred stockholders are not allocated losses.
The following weighted-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,
|
|
|
2017
|
|
2016
|
|
2015
|
|
Stock options to purchase common stock
|
362,392
|
|
|
22,638
|
|
|
173,925
|
|
|
Convertible preferred stock
|
803,323
|
|
|
803,442
|
|
|
700,241
|
|
15. 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 cumulative difference between rent expense recorded and the amount paid, for continuing operations, as of
December 31, 2017
and
2016
was
$3,957
and
$3,253
, respectively, and is included in “Accrued expenses” and “Other long-term liabilities” in the consolidated balance sheets.
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, 2017
:
|
|
|
|
|
|
|
|
|
Operating
|
|
|
Leases
|
|
2018
|
$
|
20,875
|
|
|
2019
|
13,376
|
|
|
2020
|
9,738
|
|
|
2021
|
8,022
|
|
|
2022
|
6,142
|
|
|
Thereafter
|
3,939
|
|
|
Total future minimum lease payments
|
$
|
62,092
|
|
Rent expense for continuing operations related to operating leases was
$27,511
,
$29,316
and
$31,191
, for the years ended
December 31, 2017
,
2016
and
2015
, respectively. Also, the lease agreements generally require the Company to pay executory costs such as real estate taxes, insurance, and repairs, which are recorded to expense as incurred.
16. 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
5
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
$320
,
$248
and
$221
, for the years ended
December 31, 2017
,
2016
and
2015
, 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
$8,219
,
$9,139
and
$10,331
for the years ended
December 31, 2017
,
2016
and
2015
, 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 18,
Commitments and Contingencies
.
17. Income Taxes
The following table summarizes our U.S. and foreign income (loss) from continuing operations before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
US
|
48,719
|
|
|
65,559
|
|
|
43,598
|
|
|
Foreign
|
15,485
|
|
|
(67,437
|
)
|
|
(53,692
|
)
|
|
Total
|
$
|
64,204
|
|
|
$
|
(1,878
|
)
|
|
$
|
(10,094
|
)
|
The federal, state and foreign income tax provision is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
Federal:
|
|
|
|
|
|
|
Current
|
$
|
18,792
|
|
|
$
|
21,202
|
|
|
$
|
15,161
|
|
|
Deferred
|
(19,767
|
)
|
|
(6,477
|
)
|
|
(1,606
|
)
|
|
|
(975
|
)
|
|
14,725
|
|
|
13,555
|
|
|
State:
|
|
|
|
|
|
|
Current
|
3,975
|
|
|
4,580
|
|
|
2,644
|
|
|
Deferred
|
723
|
|
|
(938
|
)
|
|
(38
|
)
|
|
|
4,698
|
|
|
3,642
|
|
|
2,606
|
|
|
Foreign:
|
|
|
|
|
|
|
Current
|
1,197
|
|
|
266
|
|
|
523
|
|
|
Deferred
|
(519
|
)
|
|
(1,597
|
)
|
|
(2,101
|
)
|
|
|
678
|
|
|
(1,331
|
)
|
|
(1,578
|
)
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
$
|
4,401
|
|
|
$
|
17,036
|
|
|
$
|
14,583
|
|
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,
|
|
|
2017
|
|
2016
|
|
2015
|
|
Federal statutory rates
|
35
|
%
|
|
35
|
%
|
|
35
|
%
|
|
Federal income tax at statutory rates
|
$
|
22,471
|
|
|
$
|
(657
|
)
|
|
$
|
(3,533
|
)
|
|
Revaluation of net deferred tax liabilities due to U.S. tax reform
|
(19,397
|
)
|
|
—
|
|
|
—
|
|
|
U.S. tax reform impact on equity income of investee
|
(1,646
|
)
|
|
—
|
|
|
—
|
|
|
Change in valuation allowance
|
2,299
|
|
|
9,480
|
|
|
3,574
|
|
|
Change in uncertain tax positions
|
7
|
|
|
73
|
|
|
(76
|
)
|
|
State income taxes, net of federal benefit
|
3,203
|
|
|
2,396
|
|
|
1,785
|
|
|
Difference between federal statutory and foreign tax rate
|
(1,648
|
)
|
|
9,427
|
|
|
4,642
|
|
|
Stock compensation
|
3,400
|
|
|
—
|
|
|
(184
|
)
|
|
Meals and entertainment
|
100
|
|
|
96
|
|
|
81
|
|
|
Amortization of deferred consideration
|
—
|
|
|
—
|
|
|
9,444
|
|
|
Transaction costs
|
159
|
|
|
—
|
|
|
(447
|
)
|
|
Contingent consideration liability reversal
|
—
|
|
|
—
|
|
|
(854
|
)
|
|
Nontaxable income
|
(1,203
|
)
|
|
—
|
|
|
(965
|
)
|
|
Tax credits
|
(354
|
)
|
|
(947
|
)
|
|
(456
|
)
|
|
Legal expense
|
(805
|
)
|
|
522
|
|
|
284
|
|
|
Depreciation
|
—
|
|
|
—
|
|
|
649
|
|
|
Equity in net loss of investee
|
569
|
|
|
624
|
|
|
366
|
|
|
Sale of joint venture
|
(6,021
|
)
|
|
—
|
|
|
—
|
|
|
Asset impairment
|
—
|
|
|
2,353
|
|
|
—
|
|
|
Foreign exchange
|
2,925
|
|
|
(7,001
|
)
|
|
—
|
|
|
Other
|
342
|
|
|
670
|
|
|
273
|
|
|
Provision for income taxes
|
$
|
4,401
|
|
|
$
|
17,036
|
|
|
$
|
14,583
|
|
|
Effective income tax rate
|
7
|
%
|
|
(907
|
)%
|
|
(144
|
)%
|
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,
|
|
|
2017
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
Net operating loss carryforwards
|
$
|
20,496
|
|
|
$
|
17,742
|
|
|
Tax credit carryforwards
|
486
|
|
|
399
|
|
|
Accounts receivable allowance
|
1,134
|
|
|
1,341
|
|
|
Accrued items and reserves
|
14,371
|
|
|
18,669
|
|
|
Stock compensation
|
1,480
|
|
|
4,224
|
|
|
Deferred rent
|
572
|
|
|
915
|
|
|
Property and equipment depreciation
|
300
|
|
|
—
|
|
|
Other
|
173
|
|
|
180
|
|
|
|
39,012
|
|
|
43,470
|
|
|
Deferred tax liabilities:
|
|
|
|
|
Deferred financing costs
|
38
|
|
|
154
|
|
|
Prepaids
|
1,440
|
|
|
2,103
|
|
|
Property and equipment depreciation
|
—
|
|
|
1,238
|
|
|
Goodwill and intangibles amortization
|
5,809
|
|
|
9,568
|
|
|
Equity investment
|
42,113
|
|
|
59,244
|
|
|
Other
|
205
|
|
|
203
|
|
|
|
49,605
|
|
|
72,510
|
|
|
Net deferred tax liabilities
|
(10,593
|
)
|
|
(29,040
|
)
|
|
Less valuation allowance
|
(26,402
|
)
|
|
(27,423
|
)
|
|
Net deferred tax liabilities
|
$
|
(36,995
|
)
|
|
$
|
(56,463
|
)
|
|
Net noncurrent deferred tax assets, net of valuation allowance of $26,402 and $27,423 for 2017 and 2016, respectively
|
4,632
|
|
|
1,510
|
|
|
Net noncurrent deferred tax liabilities, net of valuation allowance of $0 and $0 for 2017 and 2016, respectively
|
(41,627
|
)
|
|
(57,973
|
)
|
|
|
$
|
(36,995
|
)
|
|
$
|
(56,463
|
)
|
At
December 31, 2017
, the Company had no federal or state net operating loss carryforwards. The Company had net operating loss carryforwards in the following countries which can be carried forward indefinitely:
|
|
|
|
|
|
|
|
Australia
|
$
|
41,256
|
|
|
Canada
|
728
|
|
|
France
|
3,882
|
|
|
Saudi Arabia
|
82
|
|
|
UK
|
40,090
|
|
Realization of the Company’s net operating loss carryforwards is dependent on generating sufficient taxable income. 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, 2017
was negative
$1,021
, of which positive
$2,299
related to current operations and negative
$3,320
related to the adjustment of the beginning balance. The valuation
allowance includes
$25,929
primarily for Australia, France and UK net operating loss carryforwards, and
$473
for state 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.
U.S. Tax Reform
On December 22, 2017, the Tax Reform Act was enacted which institutes fundamental changes to the taxation of multinational corporations. The Tax Reform Act includes changes to the taxation of foreign earnings by implementing a dividend exemption system, expansion of the current anti-deferral rules, a minimum tax on low-taxed foreign earnings and new measures to deter base erosion. The Tax Reform Act also includes a permanent reduction in the corporate tax rate to 21%, repeal of the corporate alternative minimum tax, expensing of capital investment, and limitation of the deduction for interest expense. Furthermore, as part of the transition to the new tax system, a one-time transition tax is imposed on a U.S. shareholder’s historical undistributed earnings and profits (“E&P”) of foreign affiliates. Although the Tax Reform Act is generally effective January 1, 2018, GAAP requires recognition of the tax effects of new legislation during the reporting period that includes the enactment date, which was December 22, 2017.
As a result of the reduction in the U.S. corporate income tax rate, the Company revalued its ending net deferred tax liabilities as of December 31, 2017 and recognized a provisional tax benefit of
$19,397
. The Company has projected net accumulated deficits in foreign E&P; therefore,
no
provisional tax expense for deemed repatriation has been recognized. For any future foreign earnings, the Company will generally be free of additional U.S. tax consequences due to a dividends received deduction implemented as part of the move to a territorial tax system for foreign subsidiary earnings. The Company continues to assert indefinite reinvestment in outside basis differences. Determination of the amount of unrecognized deferred tax liability on outside basis differences is not practicable because of the complexity of laws and regulations, the varying tax treatment of alternative repatriation scenarios, and the variation due to multiple potential assumptions relating to the timing of any future repatriation.
The global intangible low taxed income (“GILTI”) provisions of the Tax Reform Act require the Company to include in its U.S. income tax return foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. The Company may be subject to incremental U.S. tax on GILTI income beginning in 2018, and has elected to account for GILTI tax in the period in which it is incurred. Therefore, no deferred tax impacts of GILTI have been considered in the Company’s consolidated financial statements for the year ended December 31, 2017.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. In accordance with the SAB 118 guidance, the Company has recognized the provisional tax impacts related to the benefit for the revaluation of deferred tax assets and liabilities in its consolidated financial statements for the year ended December 31, 2017. The final impact of the Tax Reform Act may differ from these provisional amounts, possibly materially, due to, among other things, issuance of additional regulatory guidance, changes in interpretations and assumptions the Company has made, and actions the Company may take as a result of the Tax Reform Act. In accordance with SAB 118, the financial reporting impact of the Tax Reform Act will be completed in the fourth quarter of 2018.
Unrecognized Tax Benefits
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, 2017
,
2016
and
2015
, the Company recognized approximately
$65
,
$19
and
$27
, respectively, in interest and penalties. The Company had approximately
$83
and
$52
for the payment of penalties and interest accrued as of
December 31, 2017
and
2016
, respectively.
A reconciliation of the liability for unrecognized income tax benefits is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
2017
|
|
2016
|
|
2015
|
|
Unrecognized tax benefits, beginning of year
|
$
|
1,108
|
|
|
$
|
271
|
|
|
$
|
347
|
|
|
Balance upon acquisition/disposition
|
—
|
|
|
764
|
|
|
—
|
|
|
Increase (decrease) related to prior year positions
|
22
|
|
|
37
|
|
|
(47
|
)
|
|
Increase related to current year tax positions
|
101
|
|
|
139
|
|
|
48
|
|
|
Statute of limitations expiration
|
(116
|
)
|
|
(103
|
)
|
|
(77
|
)
|
|
Unrecognized tax benefits, end of year
|
$
|
1,115
|
|
|
$
|
1,108
|
|
|
$
|
271
|
|
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
2013
to
2017
.
18. 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 “Haverhill Litigation”). 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 stockholders 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, 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 (which was subsequently extended) 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 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 then entered into a proposed settlement agreement which was submitted to the Court for approval. On September 28, 2017, the Court approved the proposed settlement agreement among the parties that provided for a settlement amount of
$10,000
less plaintiff’s legal fees and expenses (the “Settlement Amount”), with
75%
of the Settlement Amount to be paid to the Company and
25%
of the Settlement Amount to be paid to holders of the Company’s Common Stock other than certain excluded parties. In November 2017, the Company received a payment of
$5,363
from the Settlement Amount, which is included in “Other income” in the consolidated statement of income for the year ended December 31, 2017.
In addition to the matter described above, in the ordinary course of business, the Company is a party to various lawsuits. Management does not expect these lawsuits to have a material impact on the liquidity, results of operations, or financial condition of Providence.
Indemnifications related to Haverhill Litigation
The Company 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
$318
,
$1,282
and
$310
of such indemnified legal expenses related to the Haverhill Litigation during the years ended
December 31, 2017
,
2016
and
2015
, respectively, which is included in “General and administrative expenses” in the consolidated statements of income. Of these amounts,
$245
,
$757
and
$310
for the years ended
December 31, 2017
,
2016
and
2015
, respectively, were indemnified legal expenses of related parties. Other legal expenses of the Company related to the Haverhill Litigation are covered under the Company’s insurance policies, subject to applicable deductibles and customary review of the expenses by the carrier. The Company recognized expense of
$8
,
$210
and
$500
for the years ended
December 31, 2017
,
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
$941
and
$1,645
in “Other receivables” in the consolidated balance sheets at
December 31, 2017
and
2016
, respectively, with a corresponding liability amount recorded to “Accrued expenses”.
Other Indemnifications
The Company has provided certain standard indemnifications in connection with the sale of the Human Services segment to Molina Healthcare Inc. (“Molina”) effective November 1, 2015. All representations and warranties made by the Company in the Membership Interest Purchase Agreement (the “Purchase Agreement”) to sell the Human Services segment ended on February 1, 2017. However, claims made prior to February 1, 2017 by the purchaser of the Human Services segment against these representations and warranties may survive until the claims are settled. In addition, certain representations, including tax representations, survive until the expiration of applicable statutes of limitation, 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
(the “Rodriguez Litigation”)
,
a complaint filed in the District Court for the Middle District of Tennessee, Nashville Division (the “Rodriquez Court”), against Providence Community Corrections, Inc. (“PCC”), an entity sold under the Purchase Agreement. On September 18, 2017, the plaintiffs in the Rodriguez Litigation filed an unopposed motion for preliminary approval of a proposed settlement, pursuant to which PCC would pay
$14,000
to the plaintiffs and
$350
to co-defendant Rutherford County, Tennessee. On October 5, 2017, the Rodriguez Court denied preliminary approval of the settlement and requested additional information. On October 18, 2017, the plaintiffs filed a second unopposed motion for approval of the proposed settlement. On January 2, 2018, the Rodriguez Court granted preliminary approval of the proposed settlement and authorized notice to class members.
On September 15, 2017, Molina and the Company entered into a memorandum of understanding; and on March 1, 2018, Molina and the Company entered into a settlement agreement, regarding a settlement of an indemnification claim by Molina with respect to the Rodriguez Litigation and other matters. As of December 31, 2017, the accrual is
$15,000
with respect to an estimate of loss for potential indemnification claims. The Company expects to recover a portion of the settlement through insurance coverage, although this cannot be assured.
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 ended January 19, 2018; however, certain fundamental representations survive through the 36th month following the closing date. The covenants and agreements of the parties to be performed prior to the closing ended January 19, 2018, and all other covenants and agreements survive until the expiration of the applicable statute of limitations in the event of a breach, or for such lesser periods specified therein. The Company is not aware of any indemnification liabilities with respect to Matrix that require accrual at December 31, 2017.
Other Contingencies
On January 25, 2018, the UK Ministry of Justice (the “MOJ”) released a report on reoffending statistics for certain offenders who entered probation services during the period October 2015 to March 2016. The report provides statistics for all providers of probation services, including our subsidiary RRP, which is in our WD Services segment. This information is the second data set that is utilized to determine performance payments under the various providers’ transforming rehabilitation contracts with the MOJ, as the actual rates of recidivism are compared to benchmark rates established by the MOJ. Performance payments and penalties are linked to two separate measures of recidivism - the binary measure and the frequency measure. The binary measure defines the percentage of offenders within a cohort, formed quarterly, who reoffend in the following 12 months. The frequency measure defines the average number of offenses committed by reoffenders within the same 12-month measurement period. The performance for the frequency measure for most providers has been below the benchmarks established by the MOJ. As a result, RRP could be required to make payments to the MOJ and the amounts of such payments could be material. The amount of potential payments to the MOJ, if any, under RRP’s contracts with the MOJ cannot be estimated at this time, as the MOJ is
reviewing the data to understand the underlying reasons for the increase in certain rates of recidivism and other factors that could impact the contractual measure.
Deferred Compensation Plan
The Company has one deferred compensation plan for management and highly compensated employees of NET Services as of
December 31, 2017
. 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
$1,806
and
$1,430
at
December 31, 2017
and
2016
, respectively.
19. Transactions with Related Parties
The Company incurred legal expenses under an indemnification agreement with the Standby Purchasers as further discussed in Note 18,
Commitments and Contingencies
. Preferred Stock dividends earned by the Standby Purchasers during the years ended
December 31, 2017
and
2016
totaled
$4,213
each year.
During the year ended
December 31, 2017
, the Company made a
$566
loan to Mission Providence. The loan was also repaid during the year ended
December 31, 2017
.
20. 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 ownership of
46.6%
of the equity interests in Matrix as of December 31, 2017, 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 share of Matrix’s losses subsequent to the Matrix Transaction, which totaled
$13,445
and
$1,789
, is recorded as “Equity in net (gain) loss of investees” in its consolidated statement of income for the years ended
December 31, 2017
and
2016
, respectively. Matrix’s pretax loss for the year ended
December 31, 2017
totaled
$2,948
and includes
$3,537
of transaction related expenses. 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 and management fees associated with its ongoing relationship with Matrix, of which
$1,103
was received during the year ended
December 31, 2017
.
$247
and
$185
are included in “Other receivables” in the consolidated balance sheets at
December 31, 2017
and
2016
, respectively, related to management fees receivable.
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, 2017
. Proceeds include a customary working capital adjustment of
$13,246
. During the years ended
December 31, 2017
and
2016
, the Company recorded additional expenses related to the Human Services segment, principally related to legal proceedings as described in Note 18,
Commitment and Contingences
, related to an indemnified legal matter.