Notes to the Unaudited Condensed Consolidated Financial Statements
March 31, 2018
(in thousands except years, share and per share data)
1. Organization and Basis of Presentation
Description of Business
The Providence Service Corporation (“we”, the “Company” or “Providence”) 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:
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•
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Non-Emergency Transportation Services (“NET Services”) – Nationwide manager of non-emergency medical transportation (“NET”) programs for state governments and managed care organizations.
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•
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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.
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•
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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.
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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. On April 11, 2018, the Company announced an organizational consolidation plan to integrate substantially all activities and functions performed at the corporate holding company level into its wholly-owned subsidiary, LogistiCare. See Note 17,
Subsequent Events,
for further information.
Basis of Presentation
The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”). The FASB establishes accounting principles generally accepted in the United States (“GAAP”). Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. References to GAAP issued by the FASB in these footnotes are to the FASB
Accounting Standards Codification
(“ASC”), which serves as the single source of authoritative non-SEC accounting and reporting standards to be applied by non-governmental entities. All amounts are presented in United States (“U.S.”) dollars, unless otherwise noted.
The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information, and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for the fair presentation of the results of the interim periods have been included.
The Company has made estimates relating to the reporting of assets and liabilities, revenues and expenses and certain disclosures to prepare these unaudited condensed consolidated financial statements in conformity with GAAP. Actual results could differ from those estimates. Operating results for the
three
months ended
March 31, 2018
are not necessarily indicative of the results that may be expected for the fiscal year ending
December 31, 2018
. Management has evaluated events and transactions that occurred after the balance sheet date and through the date these unaudited condensed consolidated financial statements were filed, and considered the effect of such events in the preparation of these unaudited condensed consolidated financial statements.
The condensed consolidated balance sheet at
December 31, 2017
has been derived from the audited financial statements at that date, but does not include all the information and footnotes required by GAAP for complete financial statements. The unaudited condensed consolidated financial statements contained herein should be read in conjunction with the audited financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2017
.
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 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 condensed consolidated financial statements.
Reclassifications
We have reclassified certain amounts relating to our prior period results to conform to our current period presentation. See Note 2,
Significant Accounting Policies and Recent Accounting Pronouncements
, for additional information on reclassifications.
2. Significant Accounting Policies and Recent Accounting Pronouncements
The Company adopted the following accounting pronouncements during the
three
months ended
March 31, 2018
:
In May 2014, the FASB issued Accounting Standards Update (“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 replaced historical 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. The Company adopted ASU 2014-09 effective January 1, 2018 using the modified retrospective transition method for contracts that were not completed as of January 1, 2018.
The Company recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening balance of retained earnings. Upon adoption of ASU 2014-09, the cumulative effect of the changes made to the Company’s condensed consolidated balance sheet as of January 1, 2018 were as follows:
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Balance at December 31, 2017
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Adjustments due to ASU 2014-09
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Balance at January 1, 2018
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Assets
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Prepaid expenses and other
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$
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35,243
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$
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11,182
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$
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46,425
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Liabilities
|
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Accrued expenses
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103,838
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2,330
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106,168
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Deferred revenue
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17,381
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|
3,112
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20,493
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Deferred tax liability
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41,627
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|
30
|
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41,657
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Equity
|
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Retained earnings, net of tax
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204,818
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5,710
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210,528
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The impact of applying the new revenue recognition guidance on the Company’s condensed consolidated statements of income and balance sheet as of, and for the three months ended, March 31, 2018 was as follows:
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Three months ended March 31, 2018
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Statement of Income
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As Reported
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Pro forma as if the previous accounting guidance was in effect
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Service revenue, net
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$
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406,046
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$
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415,348
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Service expense
|
371,235
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377,086
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Operating income
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9,600
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13,052
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Income from continuing operations before taxes
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7,576
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|
11,028
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Net income attributable to Providence
|
5,430
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|
8,099
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Diluted earnings per share
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0.29
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|
0.46
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March 31, 2018
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Balance Sheet
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As Reported
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Pro forma as if the previous accounting guidance was in effect
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Prepaid expenses and other
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$
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52,646
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|
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$
|
41,177
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Accrued expenses
|
105,258
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103,325
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Deferred revenue
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28,745
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21,603
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Deferred tax liabilities
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40,704
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41,356
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Retained earnings, net of tax
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214,869
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211,823
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The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods. See further information in Note 3,
Revenue Recognition
.
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 adopted ASU 2016-15 on January 1, 2018. The adoption did not 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 adopted ASU 2016-18 on January 1, 2018. As a result of the adoption of ASU 2016-18, the Company recast its condensed consolidated statement of cash flows for the three months ended March 31, 2017. The recast resulted in an increase in cash used in investing activities of
$595
. See additional information in Note 4,
Cash, Cash Equivalents and Restricted Cash.
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 adopted ASU 2017-09 on January 1, 2018. The adoption of ASU 2017-09 did not have a material impact on the Company’s consolidated financial statements.
Updates to the recent accounting pronouncements as disclosed in the Company's Form 10-K for the year ended December 31, 2017 are as follows:
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 has assembled a cross-functional project team and is in the process of developing an adoption plan 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.
There were no other significant updates to the new accounting guidance not yet adopted by the Company as disclosed in its Form 10-K for the year ended
December 31, 2017
.
3. Revenue Recognition
Under ASC 606, the Company recognizes revenue as it transfers control of promised services to its customers. The Company generates all of its revenue from contracts with customers. The amount of revenue recognized reflects the consideration to which the Company expects to be entitled in exchange for these services. The Company satisfies substantially all of its performance obligations and recognizes revenue over time instead of at points in time.
Disaggregation of Revenue
The following table summarizes disaggregated revenue from contracts with customers for the three months ended March 31, 2018 by contract type for NET Services:
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State Medicaid agency contracts
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$
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177,289
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Managed care organization contracts
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159,407
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Total NET Services revenue, net
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$
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336,696
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Capitated contracts
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$
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284,402
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Non-capitated contracts
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52,294
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Total NET Services revenue, net
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$
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336,696
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The following table summarizes disaggregated revenue from contracts with customers for the three months ended March 31, 2018 by revenue category for WD Services:
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Employment preparation and placement services
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$
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42,023
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Legal offender rehabilitation services
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23,212
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Other
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4,115
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Total WD Services revenue, net
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$
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69,350
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The following table summarizes disaggregated revenue from contracts with customers for the three months ended March 31, 2018 by geographic region:
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United
States
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United
Kingdom
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Other
Foreign
|
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Total
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NET Services
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$
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336,696
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$
|
—
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|
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$
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—
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$
|
336,696
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WD Services
|
4,412
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|
40,086
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|
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24,852
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69,350
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Total
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$
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341,108
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$
|
40,086
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$
|
24,852
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$
|
406,046
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NET Services Revenue
NET Services provides non-emergency transportation services pursuant to contractual commitments over defined service delivery periods. For most contracts, NET Services arranges for transportation of members through its network of independent transportation providers, whereby it remits payment to the transportation providers. However, for certain contracts, NET Services 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.
These contracts typically include single performance obligations under which NET Services stands ready to deliver management, fulfillment and record-keeping related to non-emergency transportation services. Transportation management services include, but are not limited to, fraud, waste, and abuse and utilization review programs as well as compliance controls. NET Services’ performance obligations consist of a series of distinct services that are substantially the same and which are transferred to the customer in the same manner. In most cases, NET Services is the principal in its arrangements because it controls the services before transferring those services to the customer.
NET Services primarily uses the ‘as invoiced’ practical expedient to recognize revenue because it typically has the right to consideration from customers in an amount that corresponds directly with the value of its performance to date. This is consistent with NET Services’ historical revenue recognition policy. NET Services recognizes revenue for some of its contracts that include variable consideration using a time-elapsed measure when the fees earned relate directly to services performed in the period. Because most contracts include termination for convenience clauses with required notice periods of less than one year, most NET Services contracts are deemed to be short-term in nature.
Some of NET Services’ contracts include provisions whereby it must provide certain levels of service or face potential penalties or be required to refund fees paid by the customer. For those contracts, NET Services’ records a provision to reduce revenue to reflect the amount to which it expects it will ultimately be entitled.
The only financial impact of adopting ASU 2014-09 at NET Services was that it determined it is the agent under one of its contracts, whereas it previously considered itself the principal in the arrangement. Consequently, NET Services now recognizes revenue under the specific contract on a net basis, which resulted in
$3,937
less revenue and service expense being recorded during the
three months ended March 31, 2018
.
During the
three months ended March 31, 2018
, NET Services recognized
$6,392
from performance obligations satisfied in previous periods due to the resolution of contractual adjustments agreed with the customer.
WD Services Revenue
WD Services provides workforce development and offender rehabilitation services, which include employment preparation and placement, as well as apprenticeship and training, youth community service programs and certain health related services to clients on behalf of governmental and private entities pursuant to contractual commitments over defined service delivery periods. While the specific terms vary by contract, WD Services 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 (collectively, “outcome fees”).
Most of WD Services’ contracts include a single promise to stand ready to deliver pre-defined services. WD Services concluded its performance obligations comprise a series of distinct monthly services that are substantially the same and which are transferred to the customer in the same manner. Accordingly, the monthly promise to stand ready is accounted for as a single performance obligation. Substantially all of WD Services’ contracts include variable consideration, whereby it earns revenues if certain contractually-defined outcomes occur in the future. As the related performance obligations are satisfied, WD Services recognizes revenue for those outcomes in proportion to the amount of the related fees it estimates have been earned. The amount of revenue is based upon WD Services’ estimate of the final amount of outcome fees to be earned. WD Services evaluates probability
generally using the expected value method because the likelihood it will be entitled to variable fees is binary in nature. These estimates consider i) contractual rates, ii) assumed success rates and iii) assumed participant life on program. Generally, each of these estimates is based upon historical results, although for new contracts, other factors may be considered. At each reporting period, WD Services updates its estimate of variable consideration based on actual results or other relevant information and records an adjustment to revenue based upon services performed to date. For some of WD Services’ contracts, it recognizes revenue as it invoices customers because the amount to which it is entitled to invoice approximates the fair value of the services transferred.
WD Services constrains its estimates of variable consideration by reducing those estimates to amounts it believes with sufficient confidence will not later result in a significant reversal of revenue. When determining if variable consideration should be constrained, management considers whether there are factors outside WD Services’ control that could result in a significant reversal of revenue. In making these assessments, WD Services considers the likelihood and magnitude of a potential reversal of revenue.
For some of WD Services’ contracts, WD Services accrues for potential penalties it could incur as a result of audits by the customer. These penalties are estimated based on expectations from historical results.
Under the new standard, for certain contracts in which WD Services receives up-front fees or fixed monthly fees, WD Services may recognize revenue later than it had historically if it determines revenue should be recognized over a different period, which may include a longer period of time than under historical guidance. WD Services may recognize revenues for outcome fees earlier than it had historically. Historically, WD Services recognized those revenues upon final resolution of the outcome, at which point the outcome may be invoiced. Thus, the new standard results in a greater degree of estimation for outcome-based fees.
During the
three months ended March 31, 2018
, WD Services recognized
$1,056
from performance obligations satisfied in previous periods, based upon final resolution of amounts with the customer.
Related Balance Sheet Accounts
Accounts receivable, net
- 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. In addition, certain government entities which WD Services serves remit payment substantially beyond the payment terms. For example, under WD Services’ employability contract in Saudi Arabia, certain receivable balances are past due. 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 following table provides information about accounts receivable, net as of March 31, 2018 and December 31, 2017:
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March 31, 2018
|
|
December 31, 2017
|
Accounts receivable
|
$
|
132,125
|
|
|
$
|
122,634
|
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Allowance for doubtful accounts
|
(5,784
|
)
|
|
(5,762
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)
|
NET Services' reconciliation contract receivable
|
46,835
|
|
|
42,054
|
|
|
$
|
173,176
|
|
|
$
|
158,926
|
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Contract assets -
Primarily reflects estimated revenue expected to be billed, as the Company does not have the unconditional right to invoice these amounts. We receive payments from customers based on the terms established in our contracts. The balance of
$8,739
is included in Prepaid expenses and other in the condensed consolidated balance sheet at March 31, 2018.
NET Services accrued contract payments
- Includes liabilities related to certain contracts of NET Services for which final payment is based on a reconciliation of actual utilization and cost, and the final reconciliation may require a considerable period of time. The balance is included in Accrued liabilities in the condensed consolidated balance sheet. The balance at March 31, 2018 and December 31, 2017 totaled
$18,845
and
$17,487
, respectively.
Deferred Revenue
- Includes funds received for certain services in advance of services being rendered. The balance at March 31, 2018 and December 31, 2017 totaled
$28,745
and
$17,381
, respectively. The increase in the deferred revenue balance from December 31, 2017 to March 31, 2018 is primarily driven by cash payments received or due in advance of satisfying our performance obligations, including the impact of the adoption of the revenue recognition standard, as revenue under the WD Services youth services contract is now fully deferred until the courses are offered in the summer and fall, offset by
$5,368
of revenues recognized that were included in the deferred revenue balance as of December 31, 2017.
Costs to Obtain and Fulfill a Contract
The Company capitalizes costs incurred to fulfill its contracts that i) relate directly to the contract ii) are expected to generate resources that will be used to satisfy the Company’s performance obligation under the contract and iii) are expected to be recovered through revenue generated under the contract. Contract fulfillment costs are expensed to service expense as the Company satisfies its performance obligations. These costs, which are classified in "Prepaid expenses and other" on the condensed consolidated balance sheets, principally relate to costs deferred for work performed by sub-contractors under WD Services’ contracts that will be used in satisfying future performance obligations. These deferred costs totaled
$8,059
and
$2,543
at March 31, 2018 and December 31, 2017, respectively.
Practical Expedients, Exemptions and Other Matters
We do not incur significant sales commissions expenses. Any amounts are expensed as incurred. These costs are recorded within service expense in the condensed consolidated statements of income.
The Company generally expects the period of time from when it transfers a promised service to a customer and when the customer pays for the service to be one year or less, and thus we do not have a significant financing component for our contracts with customers.
We do not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less; (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed or (iii) contracts for which the variable consideration is allocated entirely to a wholly unsatisfied performance obligation or to a wholly unsatisfied promise to transfer a distinct good or service that forms part of a single performance obligation, and the terms of the variable consideration relate specifically to our efforts to transfer the distinct service or to a specific outcome from transferring the distinct service.
4. Cash, Cash Equivalents and Restricted Cash
The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the condensed consolidated balance sheets to the amounts shown in the condensed consolidated statements of cash flows:
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|
|
|
|
|
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|
March 31, 2018
|
|
March 31, 2017
|
Cash and cash equivalents
|
$
|
86,229
|
|
|
$
|
82,882
|
|
Restricted cash, current
|
1,597
|
|
|
2,624
|
|
Restricted cash, less current portion
|
4,267
|
|
|
10,911
|
|
Cash, cash equivalents and restricted cash
|
$
|
92,093
|
|
|
$
|
96,417
|
|
Restricted cash primarily relates to amounts held in trusts for reinsurance claims losses under the Company’s Captive insurance operation for historical workers’ compensation, general and professional liability and auto liability reinsurance programs, as well as amounts restricted for withdrawal under our self-insured medical and benefits plans.
5. Equity Investment
Matrix
As of March 31, 2018 and
December 31, 2017
, the Company owned a
43.6%
and
46.6%
noncontrolling interest in Matrix, respectively. The Company's ownership decreased as a result of the rollover of certain equity interests in HealthFair, which Matrix acquired on February 16, 2018. 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 condensed consolidated statements of income.
The carrying amount of the assets included in the Company’s condensed consolidated balance sheet and the maximum loss exposure related to the Company’s interest in Matrix as of
March 31, 2018
and
December 31, 2017
totaled
$166,031
and
$169,699
, respectively.
Summary financial information for Matrix on a standalone basis is as follows:
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|
|
|
|
|
|
March 31, 2018
|
|
December 31, 2017
|
Current assets
|
$
|
54,901
|
|
|
$
|
37,563
|
|
Long-term assets
|
745,136
|
|
|
597,613
|
|
Current liabilities
|
28,365
|
|
|
27,718
|
|
Long-term liabilities
|
376,141
|
|
|
240,513
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended
March 31, 2018
|
|
Three months ended
March 31, 2017
|
Revenue
|
$
|
67,429
|
|
|
$
|
55,855
|
|
Operating (loss) income
|
(789
|
)
|
|
1,008
|
|
Net loss
|
(8,518
|
)
|
|
(1,857
|
)
|
Included in Matrix’s standalone net loss for the three months ended March 31, 2018 are depreciation and amortization of
$9,052
, interest expense of
$10,343
, including
$6,009
related to the amortization of deferred financing costs primarily resulting from the refinancing of Matrix debt facility, equity compensation of
$737
, management fees paid to certain of Matrix’s shareholders of
$3,057
, merger and acquisition related diligence costs of
$2,169
primarily related to the first quarter acquisition of HealthFair, and an income tax benefit of
$2,614
. Included in Matrix’s standalone net loss for the three months ended March 31, 2017 were transaction bonuses and other transaction related costs of
$2,994
, equity compensation of
$643
, depreciation and amortization of
$8,033
, interest expense of
$3,607
and an income tax benefit of
$742
.
6. Prepaid Expenses and Other
Prepaid expenses and other were comprised of the following:
|
|
|
|
|
|
|
|
|
|
March 31,
2018
|
|
December 31,
2017
|
Prepaid income taxes
|
$
|
885
|
|
|
$
|
1,106
|
|
Escrow funds
|
10,000
|
|
|
10,000
|
|
Contract asset
|
8,739
|
|
|
—
|
|
Prepaid insurance
|
1,224
|
|
|
2,121
|
|
Prepaid taxes and licenses
|
3,258
|
|
|
906
|
|
Note receivable
|
3,130
|
|
|
3,224
|
|
Prepaid rent
|
1,933
|
|
|
2,268
|
|
Deposits held for leased premises and bonds
|
3,012
|
|
|
2,849
|
|
Costs to fulfill a contract
|
8,059
|
|
|
2,543
|
|
Other
|
12,406
|
|
|
10,226
|
|
Total prepaid expenses and other
|
$
|
52,646
|
|
|
$
|
35,243
|
|
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 indemnification claims, which is included in “Accrued expenses” in the condensed consolidated balance sheet as of
March 31, 2018
and
December 31, 2017
. The escrow funds will be used to satisfy a portion of this settlement. See Note 13,
Commitments and Contingencies
, for further information. “Contract asset” and “Costs to fulfill a contract” in the table above relate to the adoption of ASC 606, as described in Note 3,
Revenue Recognition
.
7. Accrued Expenses
Accrued expenses consisted of the following:
|
|
|
|
|
|
|
|
|
|
March 31,
2018
|
|
December 31, 2017
|
Accrued compensation
|
$
|
24,574
|
|
|
$
|
33,653
|
|
NET Services accrued contract payments
|
18,845
|
|
|
17,487
|
|
Accrued settlement
|
15,000
|
|
|
15,000
|
|
Income taxes payable
|
5,423
|
|
|
3,723
|
|
Other
|
41,416
|
|
|
33,975
|
|
Total accrued expenses
|
$
|
105,258
|
|
|
$
|
103,838
|
|
8. Restructuring and Related Reorganization Costs
WD Services has
two
active redundancy programs at
March 31, 2018
. During the year ended
December 31, 2017
, WD Services had
four
redundancy programs. Of these
four
redundancy plans,
two
redundancy plans were approved in 2015: a plan related to the termination of employees delivering services under an offender rehabilitation program (“Offender Rehabilitation Program”), which has been completed, 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 at Ingeus with revenue and to improve overall operating performance was approved in 2016 and began a second phase during the three months ended March 31, 2018. Further, a 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
$1,360
and
$553
during the
three
months ended
March 31, 2018
and
2017
, 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 condensed consolidated statements of income.
The initial estimate of severance and related charges for the plans was 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 during the
three
months ended
March 31, 2018
and
2017
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,
2018
|
|
Costs
Incurred
|
|
Cash Payments
|
|
Foreign Exchange
Rate Adjustments
|
|
March 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Ingeus Futures Program
|
$
|
482
|
|
|
$
|
1,380
|
|
|
$
|
(1,172
|
)
|
|
$
|
(10
|
)
|
|
$
|
680
|
|
Delivery First Program
|
1,287
|
|
|
(20
|
)
|
|
(795
|
)
|
|
44
|
|
|
516
|
|
Total
|
$
|
1,769
|
|
|
$
|
1,360
|
|
|
$
|
(1,967
|
)
|
|
$
|
34
|
|
|
$
|
1,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 1,
2017
|
|
Costs
Incurred
|
|
Cash Payments
|
|
Foreign Exchange
Rate Adjustments
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Ingeus Futures Program
|
$
|
2,486
|
|
|
$
|
553
|
|
|
$
|
(152
|
)
|
|
$
|
29
|
|
|
$
|
2,916
|
|
Offender Rehabilitation Program
|
1,380
|
|
|
—
|
|
|
(1,120
|
)
|
|
9
|
|
|
269
|
|
UK Restructuring Program
|
50
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
51
|
|
Total
|
$
|
3,916
|
|
|
$
|
553
|
|
|
$
|
(1,272
|
)
|
|
$
|
39
|
|
|
$
|
3,236
|
|
The total of accrued severance and related costs of
$1,196
is reflected in “Accrued expenses” in the condensed consolidated balance sheet at
March 31, 2018
. The amount accrued as of
March 31, 2018
is expected to be settled principally by the end of
2018
. Additionally, in conjunction with the second phase of the Ingeus Futures Program, the Company incurred
$257
of expense during the
three months ended March 31, 2018
primarily related to property and equipment costs.
9. Stockholders’ Equity
The following table reflects changes in common stock, additional paid-in capital, retained earnings, accumulated other comprehensive loss, treasury stock and noncontrolling interest for the
three
months ended
March 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Additional Paid-In Capital
|
|
Retained Earnings
|
|
Accumulated Other Comprehensive Loss
|
|
Treasury Stock
|
|
Non-controlling Interest
|
|
Total
|
|
Shares
|
|
Amount
|
|
|
|
|
Shares
|
|
Amount
|
|
|
Balance at December 31, 2017
|
17,473,598
|
|
|
$
|
17
|
|
|
$
|
313,955
|
|
|
$
|
204,818
|
|
|
$
|
(25,805
|
)
|
|
4,126,132
|
|
|
$
|
(154,803
|
)
|
|
$
|
(2,165
|
)
|
|
$
|
336,017
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
|
993
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
993
|
|
Exercise of employee stock options
|
212,789
|
|
|
1
|
|
|
8,819
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,820
|
|
Restricted stock issued
|
20,904
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3,778
|
|
|
(237
|
)
|
|
—
|
|
|
(237
|
)
|
Performance restricted stock issued
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Shares issued for bonus settlement and director stipend
|
2,715
|
|
|
|
|
|
150
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
150
|
|
Stock repurchase plan
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
583,027
|
|
|
(36,930
|
)
|
|
—
|
|
|
(36,930
|
)
|
Conversion of convertible preferred stock to common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Foreign currency translation adjustments, net of tax
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,926
|
|
|
—
|
|
|
—
|
|
|
(81
|
)
|
|
1,845
|
|
Reclassification of translation loss realized upon sale of equity investment
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Convertible preferred stock dividends
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,089
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,089
|
)
|
Noncontrolling interests
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
296
|
|
|
296
|
|
Other
|
—
|
|
|
—
|
|
|
49
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
49
|
|
Net income attributable to Providence
|
—
|
|
|
—
|
|
|
—
|
|
|
5,430
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,430
|
|
Cumulative effect adjustment from change in accounting principle
|
—
|
|
|
—
|
|
|
—
|
|
|
5,710
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5,710
|
|
Balance at March 31, 2018
|
17,710,006
|
|
|
$
|
18
|
|
|
$
|
323,966
|
|
|
$
|
214,869
|
|
|
$
|
(23,879
|
)
|
|
4,712,937
|
|
|
$
|
(191,970
|
)
|
|
$
|
(1,950
|
)
|
|
$
|
321,054
|
|
Share Repurchases
On March 29, 2018, the Board of Directors ("Board") authorized an increase in the amount available for stock repurchases under the Company’s existing stock repurchase program by
$77,794
, and extended the existing stock repurchase program through June 30, 2019 (as amended and extended, the “Stock Repurchase Program”). After giving effect to the increase in the authorized repurchase amount, as of
March 31, 2018
, approximately
$100,000
remains for additional repurchases by the Company under the Stock Repurchase Program, excluding commission payments. The share repurchases may be made from time-to-time through a combination of open market repurchases (including Rule 10b5-1 plans), privately negotiated transactions, accelerated share repurchase transactions and other derivative transactions. The timing, number and amount of any shares repurchased will be determined by the Company’s officers at their discretion, and as permitted by securities laws, covenants under existing bank agreements and other legal requirements, and will be based on a number of factors, including an evaluation of general market and economic conditions and the trading price of the common stock. The Stock Repurchase Program may be suspended or discontinued at any time without prior notice.
10. Stock-Based Compensation and Similar Arrangements
The Company provides stock-based compensation to employees and non-employee directors under the Company’s 2006 Long-Term Incentive Plan (“2006 Plan”). Typical awards issued under this plan include stock option awards, restricted stock awards (“RSAs”) and performance based restricted stock units (“PRSUs”).
The following table reflects the amount of stock-based compensation, for share settled awards, recorded in each financial statement line item for the
three
months ended
March 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2018
|
|
2017
|
Service expense
|
$
|
56
|
|
|
$
|
124
|
|
General and administrative expense
|
877
|
|
|
1,342
|
|
Equity in net loss of investees
|
60
|
|
|
27
|
|
Total stock-based compensation
|
$
|
993
|
|
|
$
|
1,493
|
|
At
March 31, 2018
, the Company had
380,989
stock options outstanding with a weighted-average exercise price of
$52.52
. The Company also had
61,557
shares of unvested RSAs outstanding at
March 31, 2018
with a weighted-average grant date fair value of
$51.21
and
4,684
vested PRSUs outstanding that were issued in April 2018.
The Company also grants stock equivalent unit awards (“SEUs”) and stock option equivalent units that are cash settled awards and are not included as part of the 2006 Plan. During the
three
months ended
March 31, 2018
and
2017
, respectively, the Company recorded
$1,832
and
$667
of stock-based compensation expense for cash settled awards. The expense for cash settled awards is included as “General and administrative expense” in the accompanying condensed consolidated statements of income. As the instruments are accounted for as liability awards, the expense recorded for the
three
months ended
March 31, 2018
and
2017
is almost entirely attributable to the Company’s increase in stock price from the previous reporting period. The liability for unexercised cash settled share-based payment awards of
$5,533
and
$3,938
at
March 31, 2018
and
December 31, 2017
, respectively, are reflected in “Accrued expenses” in the condensed consolidated balance sheets. At
March 31, 2018
, the Company had
5,202
SEUs and
200,000
stock option equivalent units outstanding.
The Company also provides cash settled long-term incentive plans for executive management and key employees of its operating segments. For the
three
months ended
March 31, 2018
and
2017
, expenses of
$57
and
$590
, respectively, are included as “Service expense” in the condensed consolidated statements of income related to an ongoing long-term incentive plan for NET Services. At
March 31, 2018
and
December 31, 2017
, the liability for this plan of
$1,143
and
$2,657
, respectively, is reflected in “Accrued expenses” and “Other long-term liabilities” in the condensed consolidated balance sheet.
The Board approved the LogistiCare 2017 Senior Executive LTI Plan (the “LogistiCare LTIP”) for executive management and key employees of NET Services during the three months ended March 31, 2018. The LogistiCare LTIP pays in cash, however up to
50%
of the award may be paid in unrestricted stock if the recipient elects this option prior to the award payment date. The LogistiCare LTIP rewards participants based on certain measures of free cash flow and EBITDA results adjusted as specified in the plan document. The awards have a performance period of January 1, 2017 through December 31, 2019, with a payout date within two and a half months of the performance period end date. Payout is subject to the participant remaining employed by the Company on the payment date. The maximum amount that can be earned through the LogistiCare LTIP is
$7,000
. As of March 31, 2018,
46.5%
of the awards have been issued under the LogistiCare LTIP.
11. Earnings Per Share
The following table details the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2018
|
|
2017
|
Numerator:
|
|
|
|
Net income attributable to Providence
|
$
|
5,430
|
|
|
$
|
(4,325
|
)
|
Less dividends on convertible preferred stock
|
(1,089
|
)
|
|
(1,090
|
)
|
Less income allocated to participating securities
|
(579
|
)
|
|
(58
|
)
|
Net income (loss) available to common stockholders
|
$
|
3,762
|
|
|
$
|
(5,473
|
)
|
|
|
|
|
Continuing operations
|
$
|
3,770
|
|
|
$
|
394
|
|
Discontinued operations
|
(8
|
)
|
|
(5,867
|
)
|
|
$
|
3,762
|
|
|
$
|
(5,473
|
)
|
|
|
|
|
Denominator:
|
|
|
|
Denominator for basic earnings per share -- weighted-average shares
|
13,105,965
|
|
|
13,704,272
|
|
Effect of dilutive securities:
|
|
|
|
Common stock options
|
88,791
|
|
|
58,313
|
|
Performance-based restricted stock units
|
4,684
|
|
|
5,939
|
|
Denominator for diluted earnings per share -- adjusted weighted-average shares assumed conversion
|
13,199,440
|
|
|
13,768,524
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
Continuing operations
|
$
|
0.29
|
|
|
$
|
0.03
|
|
Discontinued operations
|
—
|
|
|
(0.43
|
)
|
|
$
|
0.29
|
|
|
$
|
(0.40
|
)
|
Diluted earnings (loss) per share:
|
|
|
|
Continuing operations
|
$
|
0.29
|
|
|
$
|
0.03
|
|
Discontinued operations
|
—
|
|
|
(0.43
|
)
|
|
$
|
0.29
|
|
|
$
|
(0.40
|
)
|
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:
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2018
|
|
2017
|
Stock options to purchase common stock
|
12,142
|
|
|
165,371
|
|
Convertible preferred stock
|
803,200
|
|
|
803,398
|
|
12. Income Taxes
The Company’s effective tax rate from continuing operations for the
three
months ended
March 31, 2018
and
2017
was
24.3%
and
56.8%
, respectively. The effective tax rate for the
three months ended March 31, 2018
exceeded the U.S. federal
statutory rate of
21%
primarily due to foreign net operating losses for which the future income tax benefit currently cannot be recognized, state income taxes and certain non-deductible expenses, partially offset by the favorable impact of stock option deductions. The effective tax rate for the
three months ended March 31, 2017
exceeded the U.S. federal statutory rate of
35%
primarily due to foreign net operating losses (including equity investment losses) for which the future income tax benefit currently cannot be recognized, losses in foreign jurisdictions with tax rates lower than the U.S. rate, state income taxes and certain non-deductible expenses.
On December 22, 2017, the U.S. bill commonly referred to as the Tax Cuts and Jobs Act (“Tax Reform Act”) was enacted which institutes fundamental changes to the taxation of multinational corporations. As a result of the Tax Reform Act, the U.S. corporate income tax rate was reduced to 21% and the Company revalued its ending net deferred tax liabilities as of December 31, 2017. The Company recognized a provisional tax benefit of
$19,397
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. There have been no changes to the Company's provisional tax benefit recognized in 2017. The Company expects the financial reporting impact of the Tax Reform Act will be completed in the fourth quarter of 2018.
13. 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 (“Haverhill Litigation”).
On September 28, 2017, the Court approved a proposed settlement agreement among the parties that provides for a settlement amount of
$10,000
less plaintiff’s legal fees and expenses (the “Settlement Amount”), with
75%
of the Settlement Amount to be paid to the Company and
25%
of the Settlement Amount to be paid to holders of the Company’s common stock other than certain excluded parties. In November 2017, the Company received a payment of
$5,363
from the Settlement Amount.
For further information regarding this legal proceeding please see Note 18,
Commitments and Contingencies
, in the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
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 has indemnified certain third parties in connection to a rights offering on February 5, 2015 as well as in connection to the Company’s acquisition of CCHN Group Holdings, Inc. (operating under the tradename Matrix, and formerly included in our Health Assessment Services segment) in October 2014 and related financing commitments. For further information regarding these indemnifications, please see Note 18,
Commitments and Contingencies
, in the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017.
The Company recorded
$132
of such indemnified legal expenses related to the Haverhill Litigation during the
three
months ended March 31, 2017 which is included in “General and administrative expense” in the condensed consolidated statements of income. Of this amount,
$115
was indemnified legal expenses of related parties. Other legal expenses of the Company related to the Haverhill Litigation are covered under the Company’s insurance policies, subject to applicable deductibles and customary review of the expenses by the carrier. The Company recognized related expense of
$11
for the
three
months ended March 31,
2017
. 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
$145
and
$941
in “Other receivables” in the condensed consolidated balance sheets at
March 31, 2018
and
December 31, 2017
, 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. Certain representations made by the Company in the
Membership Interest Purchase Agreement (the “Purchase Agreement”), including tax representations, survive until the expiration of applicable statutes of limitation, and healthcare representations survive until the third anniversary of the closing date.
Molina and the Company have entered into a settlement agreement regarding a settlement of an indemnification claim by Molina with respect to Rodriguez v. Providence Community Corrections (the “Rodriguez Litigation”), a complaint filed in the District Court for the Middle District of Tennessee, Nashville Division (the “Rodriguez Court”) against Providence Community Corrections, Inc. (“PCC”), an entity sold under the Purchase Agreement, and other matters. As of March 31, 2018, 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. The parties to the Rodriguez Litigation submitted a proposed settlement to the Rodriguez Court for approval pursuant to which PCC would pay the plaintiffs approximately
$14,000
. On January 2, 2018, the Rodriguez Court granted preliminary approval of the proposed settlement and authorized notice to class members.
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 March 31, 2018.
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.
Loss Reserves for Certain Reinsurance Programs
The Company historically reinsured a substantial portion of its automobile, general and professional liability and workers’ compensation costs under reinsurance programs through the Company’s wholly-owned subsidiary, Social Services Providers Captive Insurance Company (“SPCIC”), a licensed captive insurance company domiciled in the State of Arizona. As of May 16, 2017, SPCIC did not renew the expiring reinsurance policies. SPCIC continues 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
March 31, 2018
and
December 31, 2017
, the Company had reserves of
$6,261
and
$6,699
, 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
March 31, 2018
and
December 31, 2017
of
$11,630
and
$12,448
, respectively, is classified as “Reinsurance liability reserves” and “Other long-term liabilities” in the condensed consolidated balance sheets. The estimated amount to be reimbursed to SPCIC as of
March 31, 2018
and
December 31, 2017
was
$5,369
and
$5,749
, respectively, and is classified as “Other receivables” and “Other assets” in the condensed consolidated balance sheets.
Deferred Compensation Plan
The Company has
one
deferred compensation plan for highly compensated employees of NET Services as of
March 31, 2018
. 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 condensed consolidated balance sheets, was
$1,920
and
$1,806
at
March 31, 2018
and
December 31, 2017
, respectively.
14. Transactions with Related Parties
The Company incurred legal expenses under an indemnification agreement with the Standby Purchasers as further discussed in Note 13,
Commitments and Contingencies
. Convertible preferred stock dividends earned by the Standby Purchasers during the
three
months ended
March 31, 2018
and
2017
totaled
$1,039
and
$1,039
, respectively.
During the three months ended March 31, 2017, the Company made a
$566
loan to Mission Providence. The loan was repaid during the three months ended September 30, 2017.
15. Discontinued Operations
On November 1, 2015, the Company completed the sale of the Human Services segment. During the
three
months ended
March 31, 2018
and
2017
, the Company recorded additional expenses related to the Human Services segment, principally related to legal proceedings as described in Note 13,
Commitments and Contingencies
, related to an indemnified legal matter.
Results of Operations
The following tables summarize the results of operations classified as discontinued operations, net of tax, for the Company's Human Services segment for the
three
months ended
March 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
|
2018
|
|
2017
|
|
|
|
|
Operating expenses:
|
|
|
|
General and administrative expense
|
$
|
11
|
|
|
$
|
9,406
|
|
Total operating expenses
|
11
|
|
|
9,406
|
|
Loss from discontinued operations before income taxes
|
(11
|
)
|
|
(9,406
|
)
|
Income tax benefit
|
3
|
|
|
3,540
|
|
Discontinued operations, net of tax
|
$
|
(8
|
)
|
|
$
|
(5,866
|
)
|
General and administrative expense for the three months ended
March 31, 2018
includes legal expenses of
$11
. General and administrative expense for the
three
months ended
March 31, 2017
includes an accrual of
$9,000
for an estimated settlement of indemnified claims related to the sale of the Human Services segment, as well as related legal expenses of
$406
. See Note 13,
Commitments and Contingencies
, for additional information.
16. Segments
The Company 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:
|
|
•
|
NET Services – Nationwide manager of NET programs for state governments and managed care organizations.
|
|
|
•
|
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 Matrix, a nationwide provider of in-home care optimization and management solutions, including 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.
The following tables set forth certain financial information from continuing operations attributable to the Company’s business segments for the
three
months ended
March 31, 2018
and
2017
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2018
|
|
NET Services
|
|
WD Services
|
|
Matrix
Investment
|
|
Corporate and
Other
|
|
Total
|
Service revenue, net
|
$
|
336,696
|
|
|
$
|
69,350
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
406,046
|
|
Service expense
|
310,701
|
|
|
60,534
|
|
|
—
|
|
|
—
|
|
|
371,235
|
|
General and administrative expense
|
2,937
|
|
|
7,613
|
|
|
—
|
|
|
7,863
|
|
|
18,413
|
|
Depreciation and amortization
|
3,494
|
|
|
3,218
|
|
|
—
|
|
|
86
|
|
|
6,798
|
|
Operating income (loss)
|
$
|
19,564
|
|
|
$
|
(2,015
|
)
|
|
$
|
—
|
|
|
$
|
(7,949
|
)
|
|
$
|
9,600
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net gain (loss) of investee
|
$
|
—
|
|
|
$
|
23
|
|
|
$
|
(2,344
|
)
|
|
$
|
—
|
|
|
$
|
(2,321
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2017
|
|
NET Services
|
|
WD Services
|
|
Matrix
Investment
|
|
Corporate and
Other
|
|
Total
|
Service revenue, net
|
$
|
324,034
|
|
|
$
|
75,460
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
399,494
|
|
Service expense
|
306,192
|
|
|
63,203
|
|
|
—
|
|
|
15
|
|
|
369,410
|
|
General and administrative expense
|
2,891
|
|
|
7,044
|
|
|
—
|
|
|
7,092
|
|
|
17,027
|
|
Depreciation and amortization
|
3,151
|
|
|
3,040
|
|
|
—
|
|
|
78
|
|
|
6,269
|
|
Operating income (loss)
|
$
|
11,800
|
|
|
$
|
2,173
|
|
|
$
|
—
|
|
|
$
|
(7,185
|
)
|
|
$
|
6,788
|
|
|
|
|
|
|
|
|
|
|
|
Equity in net gain (loss) of investee
|
$
|
—
|
|
|
$
|
(1,400
|
)
|
|
$
|
(660
|
)
|
|
$
|
—
|
|
|
$
|
(2,060
|
)
|
Geographic Information
Domestic service revenue, net, totaled
84.0%
and
82.0%
of service revenue, net for the
three
months ended
March 31, 2018
and
2017
, respectively. Foreign service revenue, net, totaled
16.0%
and
18.0%
of service revenue, net for the
three
months ended
March 31, 2018
and
2017
, respectively.
At
March 31, 2018
and
December 31, 2017
,
$91,216
, or
22.9%
, and
$99,071
, or
20.8%
, respectively, of the Company’s net assets were located in countries outside of the U.S.
17. Subsequent Events
On April 11, 2018, the Company announced an organizational consolidation plan to integrate substantially all activities and functions performed at the corporate holding company level into its wholly-owned subsidiary, LogistiCare. As part of the organizational consolidation process, the Company’s Stamford, CT headquarters and Tucson, AZ satellite office will be closed. The Company adopted an employee retention plan designed to incentivize current holding company level employees to remain employed with the Company during the transition. The retention plan became effective on April 9, 2018 and covers the holding company level employees and provides for certain payments and benefits to be provided to the employees if they remain employed with the Company through a retention date established for each individual, subject to a fully executed retention letter.
In connection with the consolidation plan, the Company also entered into an agreement with R. Carter Pate for his continued employment as the Company’s Interim CEO through June 30, 2019. The agreement additionally provides for a grant of unvested options to purchase up to
394,000
shares of the Company's Common Stock, at a price of
$71.67
per share, which was the closing price of the Company’s Common Stock on the grant date. The options are subject to vesting as follows: (i)
50%
of the options will become vested if Mr. Pate remains employed by the Company through June 30, 2019, (ii)
25%
of the options will become vested on March 31, 2019 if the Company has achieved its budget for its 2018 fiscal year, subject to certain adjustments, and Mr. Pate is then employed, and (iii)
25%
of the options will become vested on March 31, 2019 subject to Mr. Pate’s achievement of other performance metrics if Mr. Pate is then employed. Once vested, the options will remain exercisable until April 8, 2021, unless terminated earlier due to a termination of Mr. Pate’s employment for “cause”. In recognition of certain holding company employees’ essential contributions to the success of the Company, and to encourage further alignment with the Company’s long-term interests through the ownership of equity, Mr. Pate voluntarily set aside
98,500
of the options granted to him, representing
25%
of his total award. The Compensation Committee of the Board expects to grant to these employees at a later date, based upon their performance throughout the organizational consolidation process, restricted stock awards equivalent in value to the options voluntarily set aside by Mr. Pate.
Also in connection with the consolidation plan, on April 9, 2018, William Severance received an option to purchase
13,710
shares of Common Stock at a price of
$71.67
per share, which was the closing price of the Company’s Common Stock on the grant date. The options will become fully exercisable on May 10, 2019, subject to Mr. Severance’s continued employment with the Company, and if not exercised will expire on December 31, 2020.