2 0 14 A N N U A L R E P O R T
Providence Service Corporation has assembled a portfolio of complementary businesses that span
the healthcare and social services continuum, encompassing non-emergency transportation services,
government sponsored human services, innovative global employment services, and comprehensive
health assessment and care management services. Each business vertical is a market leader with a
scalable growth platform and is positioned to benefit from macro trends and expanding populations
under government sponsored services including Medicare and Medicaid. These businesses also share
common objectives of embracing home and community based delivery models, utilizing technology to
drive competitive advantages, reducing costs for its payors, while improving outcomes and promoting
healthy and productive communities.
H E A LT H C A R E S E R V I C E S
S O C I A L S E R V I C E S
LOGIST IC A R E
PROV I DE NC E
HUMAN SERVICES
I NGEUS
M AT R I X
MEDICAL NETWORK
Non-Emergency
Medical Transportation
Behavioral Healthcare,
Foster Care, Corrections
Workforce Development,
Justice Services
In-home Comprehensive
Health Assessments
Revenue:
$884.3 million
Revenue:
$374.2 million
Revenue:
$179.3 million
Revenue:
$43.3 million
Pro Forma Revenue:
$884.3 million
Pro Forma Revenue:
$374.2 million
Pro Forma Revenue:
$331.8 million
Pro Forma Revenue:
$211.4 million
P R OV I DE NC E S E RV IC E C O R P O R A T IO N
2 014 C H A I R M A N ’ S L ET T E R
Dear Providence Shareholders,
2014 was a transformative year for The Providence Service
Corporation. During the year, Providence started the transi-
tion to a streamlined holding company structure and com-
pleted two significant acquisitions. Energy and momentum
have been injected throughout the organization, driving value-
enhancing strategic and operating initiatives across the
Company’s portfolio. As a result of these actions, we enter
2015 more efficient operationally and financially than at any
point in our history. We begin this new chapter, positioned as a
global leader in healthcare and social services.
Providence’s portfolio is poised to benefit from powerful
demographic and fiscal trends. As governments increasingly
look to outsource functions to experienced private market
providers, our businesses are responsive partners. As aging
populations stress the financial viability of our healthcare sys-
tem, our businesses deliver meaningful and cost-effective
solutions. As long-term health maintenance plans and patient
accountability gain traction, our health assessment and
transportation networks offer critical components. As focus
intensifies on behavioral health, our national footprint of
counselors and social workers support the mental health
needs of their communities. As social challenges from unem-
ployment to recidivism persist, our training and job placement
deliver positive outcomes.
Before we dive into the specific accomplishments of 2014,
I would like to thank each of my 12,000 colleagues at
Providence for their tireless work over the past twelve months.
Our people and culture are enormous competitive advantages
and vital to our continued success. We have dedicated indi-
viduals across our organization pursuing challenging and admi-
rable work—nurses caring for patients, social workers providing
counseling, operators coordinating healthcare transportation,
advisors seeking jobs for the unemployed, among many
others. Every day, Providence employees are striving to
improve the well-being of our communities. This mission is an
unwavering priority.
HOL DI NG C OM PA N Y ST RUC T U R E
Over the past two years, we have significantly upgraded the
Providence senior leadership team. During 2014, we realigned
corporate responsibilities under a “holding company” struc-
ture. Under this new framework there is a clearer division
between our holding company executives and our busi-
ness CEOs.
At the holding company, our executive team is tasked with two
critical responsibilities:
1. Guide the allocation of strategic and financial resources
2. Support and facilitate the success of portfolio companies
At our individual companies, the structure provides our CEOs
with greater autonomy to run their businesses. This framework
is built on the independence and unique characteristics of
the operations, workforces and customer bases. However,
meaningful shared services can still be leveraged, including:
industry and market knowledge, strategic guidance, reporting
and financial planning, financing flexibility, process improve-
ment tools, human capital systems, healthcare/insurance
benefits, and risk/compliance management.
We believe this realignment positions Providence to capitalize
on dynamic growth prospects, as well as take advantage of
compelling acquisition opportunities as they arise.
AC QU I SI T ION S
INGEUS
In May, we closed the acquisition of Ingeus. This was a “value”
investment in a unique international company. The financial
structure, heavily weighted towards contingent consideration,
created the opportunity for long-term favorable investment
returns while protecting shareholders against the potential
underperformance of the business.
Ingeus diversifies Providence’s service offerings, payor base
and geographic footprint, providing the necessary infra-
structure and experience to deliver healthcare and social
services on an international basis. From London to Riyadh
to Seoul, we are seeing similar healthcare and social trends
to those unfolding in the U.S. Ingeus’s local expertise and
global perspective is an invaluable resource as we work with
governments and underserved populations.
Post-acquisition, we hit the ground running at Ingeus with
remarkable success. Since May, we have expanded the busi-
ness from unemployment services into probation, education
and training services. The implementation of our process and
contract underwriting initiatives are well under way. The global
headquarters was relocated to London, immediately reducing
the cost structure and better aligning UK and global opera-
tions. The operation of our legacy U.S. and Canadian employ-
ment services were successfully transitioned to Ingeus. Lastly,
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2 014 A N N UA L R E P O R T
we realigned leadership behind Jack Sawyer and Greg
Ashmead, as UK-CEO and Global-CEO, respectively.
2015 will be a year of significant investment and heavy lifting
at Ingeus. We are directing considerable capital and operating
expenses towards ramping up new contracts, which will lay a
foundation for long-term value creation.
M ATRIX MEDIC AL NE T WORK
In October, we closed the acquisition of Matrix. This was a
strategic investment in a national network of highly-skilled
nurse practitioners, capable of operating in the challenging
home and community setting. The business has industry-
leading technology, customer relationships and operational
expertise. Matrix is well-positioned to meet the increasing
demand for the stratification, assessment and treatment of
health risks across large and diverse populations. As in-home
healthcare continues to gain momentum as an alternative to
higher cost facility-based options, we are investing behind
initiatives to expand the business’s network into new service
lines and markets. Concurrent with the acquisition, Walt
Cooper was promoted from COO to CEO.
Matrix exemplifies the Providence goal of improving health
outcomes, while lowering overall costs.
H U M A N SE RV IC E S R E A L IG N M E N T
Providence Human Services continues to work through a
multifaceted realignment. A new management team has been
shaped under the stewardship of Mike Fidgeon, who was
recently promoted from COO to CEO. Our consolidation
of back office functions, across a historically decentralized
model, is nearing completion. Contracts and services are
being actively managed, and culled when there is not a clear
pathway to profitability. Service lines are being focused by
core competencies, while still balancing the need to specifi-
cally tailor behavioral health offerings to heterogeneous com-
munities and populations. This multi-year process is beginning
to bear fruit and continues to be well worth the investment.
The cornerstone of Human Services is the dedicated and pas-
sionate counselors and social workers serving across the
country. Together, these individuals form a unique national
network offering highly impactful behavioral health expertise.
L O G I ST IC A R E
LogistiCare continues to perform well. CEO Herman Schwarz
and his team posted another strong year of double digit
growth—leveraging the business’s scale and sophistication
to successfully on-board increased membership and new
contracts. In 2014, the business managed a remarkable 56
million calls and 48 million transports. Importantly, this
growth has not come at the sacrifice of profitability, as
LogistiCare has remained disciplined in bidding for contracts
and has not chased low margin volume.
New contract wins and the renewal of existing contracts is a
testament to LogistiCare’s outstanding customer-focused
service. Our priority is providing the highest quality offerings
to our government and commercial partners. Additionally,
MCO business opportunities continue to be an exciting area
of growth.
At LogistiCare, we are not resting on our laurels. We are mak-
ing meaningful investments to continually improve service,
from technology to call center personnel to account manage-
ment teams. As customer requirements rise, LogistiCare will
continue to exceed expectations. We have come to expect a
lot from LogistiCare and we are excited to begin 2015.
C ONC LUSION
Looking forward, Providence has a long list of substantive
strategic and operational initiatives well under way. In 2015,
we are heavily investing within our companies to further out-
pace competition. Intelligent capital allocation is paramount,
and is being driven by greater transparency and accountability
throughout the organization.
The Providence value proposition is simple: We invest behind
world-class leaders and strong businesses with unique assets.
As we begin 2015, our portfolio of companies is positioned to
capitalize upon favorable government and healthcare trends.
At the board level, we are actively engaged in stewarding
resources to drive long-term shareholder value. We are proud
of the Company’s accomplishments in 2014 and excited to
begin another chapter.
Thank you for your continued support,
Chris Shackelton
Chairman of the Board
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P R OV I DE NC E S E RV IC E C O R P O R A T IO N
L ET T E R F ROM T H E C EO
Dear Shareholders:
2014 was a pivotal year for Providence Service Corporation in
its evolution to a holding company structure. We acquired two
excellent companies, Ingeus and Matrix Medical Networks,
companies we view as strategic long-term investments. We
strengthened the leadership teams at our verticals and made a
number of important hires in the Providence corporate office
to support our new business structure and value creation
strategy. As a result of these changes, Providence exited the
year as a very different company, with a portfolio of busi-
nesses that span the healthcare and social services continuum
and provide new platforms for growth.
A L I T T L E H I ST ORY
This transformation of Providence began in November of
2012. At that time, the Board of Directors determined that
there was unrealized value within Providence and that the
Company should embrace new strategy and direction. The
Board asked if we would lead this transformation so that greater
shareholder value could be achieved. The plan we presented to
the Board embodied five principles and an overriding macro
issue related to corporate culture which needed to be
addressed for the organization to become a high performance
Company. The Board embraced the concepts as presented
and we subsequently shared this outline with all of our
stakeholders.
The first step in changing the performance of the Company
involved completely altering the current culture, which had
become complacent, contributing to declining margins and
relatively flat revenue growth. We did this by engaging our
colleagues at all levels of the organization in defining the new
Vision, Mission, and Values and by meeting face-to-face with
our leadership and associates in all geographies in which we
have a presence. The overwhelming acceptance of this
approach allowed us to begin the execution of our five princi-
ples of high performance: efficient and effective operations,
organic growth, acquisitive growth, technology investment,
and performance management alignment.
As we have reported over the last 18 months, we began to see
an immediate impact on performance with the execution of
our plan. Our margins began to improve and we started to see
revenue growth opportunities. By July/August of 2013 our
performance had improved to the point that we were able to
refinance the Company at historically low interest rates which
gave us the necessary capital structure to look at the market
for acquisitions.
Simultaneously, we recruited a nearly new senior manage-
ment team. This team enthusiastically endorsed the notion of
building a new Providence along a continuum of outsourced
contracts in healthcare and social services. Rather than build
a single operating platform, we decided to create the holding
company structure you see today, with multiple vertical busi-
ness segments, each being a platform for growth by serving
specific client populations.
Our first acquisition was Ingeus, an outsourced employment,
education, training, and probationary services company which
deals, primarily, with the chronically unemployed. Our second
acquisition was Matrix which is a comprehensive health
assessment company that has a senior healthcare orientation.
Additionally, we negotiated a significant joint venture with
Mission Australia, one of the largest not-for-profit organiza-
tions in the country. Both acquisitions have exhibited favor-
able financial potential through higher margins or returns on
capital than either LogistiCare or Providence Human Services
(PHS) which will allow us to improve our key financial metrics.
PL AT FOR M S FOR G ROW T H
Today we operate under four business ver ticals, non-
emergency transportation services (LogistiCare), government
sponsored human services (PHS), innovative global employ-
ment services (Ingeus), and comprehensive health assessment
and care management services (Matrix). Each is a market
leader and is well positioned to benefit from the continued
growth and outsourcing of healthcare and social services by
governments across the globe. This positioning has led to
continued positive financial results in 2014.
We generated double digit organic growth and overall we
reported consolidated revenue of $1.5 billion in 2014, an
increase of 32%. Including the full year results of our Matrix
and Ingeus acquisitions as if they had occurred on January 1,
2014, pro forma revenue was $1.8 billion. While net income
was relatively flat after adjusting for asset impairment charges
and other acquisition, financing, integration and restructuring
costs, adjusted EBITDA increased 52% to $84.0 million in
2014 with pro forma adjusted EBITDA of $159 million.
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2 014 A N N UA L R E P O R T
C ON T I N U I NG T O T R A N SFOR M
T H E BUSI N E S S
In 2015, we will continue to extend our services across adja-
cent markets and geographies, develop new services that
leverage our current platforms and accelerate strategic and
operational improvements in all our verticals.
In our LogistiCare business, we will work to maintain our
market leadership through innovation and exceptional service.
At year end we had 21.5 million individuals eligible to receive
services, up 36% from a year ago. We expect another year of
double digit top line growth in 2015 with opportunities for
growth in the managed care space and a couple of regional
contracts set to begin mid-year, although margins will likely
decline slightly from the historical levels seen in 2014. We are
working hard to retain our existing business where new RFPs
are due and are also optimistic that several states will look to
outsource their transportation needs in the year ahead.
In PHS, while revenue grew year-over-year in 2014, our prof-
itability declined due to underperforming contracts in certain
markets, including our Texas contract that we exited during
the year. As we move into 2015, we will further scrutinize
our portfolio of contracts and continue to implement select
productivity and realignment activities. As a result, we expect
to see improving margins in 2015 and organic revenue growth
as a result of the innovative and client-focused solutions we
are delivering in homes and communities across the US.
In Ingeus, we are delivering under current contracts and
diversifying the business beyond the core welfare to work
market on which the business was founded. Since our acqui-
sition in May of last year, we have won approximately $800
million of new contracts and have a large pipeline which should
lead to revenue growth in the mid-teens or more on a per-
centage basis. This revenue growth, led by our significant
UK Ministry of Justice probation services contract, will help
offset the anticipated slowdown of our large UK work pro-
gram. While this new business will require that we make
upfront investments in 2015, over the longer term we are
optimistic not only on future profitability, but the ability to
secure opportunities to deliver value-added solutions to those
in need across the globe.
Finally our newest vertical, Matrix, which we added in October
2014, had a great year with revenue up over 25% and improv-
ing productivity. 2015 should be another good year for reve-
nue growth and margins. We see continued opportunity in
the Medicare Advantage market to build scale as we sign
new customers and expand our relationships, penetrate new
markets and roll out new services such as in-home screenings
and medication therapy management.
L ONG -T E R M VA LU E C R E AT ION
While longer-term we will look to opportunistically make
acquisitions as we seek to build a world-class healthcare and
social service company, we are currently seeing higher returns
deploying cash within our existing businesses. Ultimately the
decision to acquire versus invest is a capital allocation ques-
tion. We will work closely with our divisional management
teams on the strategic priorities and investments that will
drive long-term value creation and generate the greatest
return for our shareholders while we seek to reduce health-
care costs for our customers, improve outcomes for our
clients and promote healthy and productive communities.
I also want to thank our Board for their unyielding attention to
the details of good corporate governance and adherence to
a well thought out corporate strategy. To execute on our stra-
tegic plan in such a short period of time requires a strong
and supportive Board of Directors. I particularly want to thank
our Chair, Chris Shackelton, who has added value to our
deliberations and negotiations. It also takes a dedicated
senior management team and exceptional leadership at the
business segment level to get us to where we are today in such
a short period of time. I want to thank my colleagues across
Providence for their continued commitment and remarkable
high performance.
Sincerely,
Warren S. Rustand
Chief Executive Officer
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P R OV I DE NC E S E RV IC E C O R P O R A T IO N
LOGIST IC A R E
A C C E S S TO E S S E N T I A L C A R E
LogistiCare is committed to making sure the most fragile populations have
access to essential care and its clients, members and community partners
have a partner with a record of efficiency and accountability. To this end, in
2014, LogistiCare became the first and only manager of non-emergency
medical transportation to earn nationally-recognized URAC accreditation
for quality in all of its operations. For the more than 21 million members
LogistiCare serves, URAC accreditation ensures their transportation needs
are entrusted to a safe, reliable and responsive organization. For healthcare
organizations, accreditation assures that LogistiCare complies with all state
and federal guidelines and is the best partner to effectively and efficiently
service their members. URAC accreditation validates the approach
LogistiCare takes every single day. It’s unsurpassed in the industry.
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2 014 A N N UA L R E P O R T
PROV I DE NC E H U M A N SERV IC ES
A LT E R N AT I V E S TO I N S T I T U T I O N A L C A R E
Providence Human Services is dedicated to ensuring the provision of accessible, effective, high quality community-based counseling
and social services as an alternative to traditional institutional care. We specialize in providing direct services and case management to children,
adolescents and adults with behavioral and mental health needs, as well as those supervised by government subsidized programs. We deliver services
in our clients’ homes and through community-based resources. All services are offered by trained therapists, behavioral specialists and/or
paraprofessionals under supervision of licensed clinicians. Our primary services are varied, and we are continually creating new programs in response
to research and identified needs of our clients. Based on evidence-based therapeutic techniques, we created our Therapeutic Day Treatment
program where our counselors go into schools to work with teachers and administrators to assist students with emotional and behavioral concerns,
reduce disruptive behavior and ultimately prevent out-of-school placement. To help meet the needs of an underserved subset of children and
adolescents with mental illnesses, those with emotional and behavioral disturbances so severe they are at imminent risk of out-of-home placement,
we created our Virtual Residential Program© which combines the structure of residential programs with the value and benefits of in-home efficacy,
with the ultimate goal of keeping families intact. Under our Collaborative Care programs, we provide a focused approach to managing the medical,
behavioral and social needs of potentially high-cost healthcare consumers with chronic conditions and complex social challenges. We collaborate
with the right service partners, including managed care organizations, commercial insurers and government agencies, in order to deliver the
highest-quality, patient-centered care that results in optimal outcomes, reduced re-admissions and lower costs while affording our consumers a
better quality of life.
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P R OV I DE NC E S E RV IC E C O R P O R A T IO N
I NGEUS
H E L P I N G P E O P L E TO T R A N S F O R M T H E I R L I V E S
Ingeus is a leading and trusted provider of people-centered services, such as large scale welfare to work services, employability programs, skills
training and health-related support. We have a reputation for delivering culturally appropriate, highly effective and individualized, quality services.
Through our intervention, tens of thousands of people are working, contributing to their community, earning an independent income to help sup-
port their families, and building brighter futures. By developing an understanding of individual circumstances, we encourage a sense of hope, aspira-
tion and self-belief in order to help our clients to uncover their signature strengths and progress into work and in life. Our work primarily focuses on
assisting people who are on unemployment or health-related benefits to get a job. We work alongside partner organizations from the public, private
and not-for-profit sectors that share our commitment to delivering excellence with integrity. The skills we use to do this important work can also be
translated to other services that require people to build on their strengths and capabilities in order to gain independence. One example includes
justice services where we are helping to reduce reoffending through work and training, with employment as a key factor to prevention. We are also
the second largest provider of national citizen services in the UK where we teach young people life skills and bring people from different communi-
ties together and we are bringing our skills/training work to bear internationally through our outplacement services with the private sector. By
empowering people to achieve independence through vocational training and lasting employment it is possible to get results that transform lives.
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2 014 A N N UA L R E P O R T
M AT R I X
C H A N G I N G T H E WAY H E A LT H C A R E I S D E L I V E R E D
At Matrix, we understand that access to care often translates to quality of care. In 2007, we
broke the mold on the traditional physician office visit care model, and decided that the best
place for care is in the home. That’s why we pioneered the use of Nurse Practitioners to visit
health plan members where they needed care the most—in their home or a nursing facility. It
is this pioneering attitude that has helped us continue to innovate the way care is delivered.
Our Nurse Practitioners take the time to listen, engage, educate and deliver personalized care
to Medicare Advantage members across the country. We address the big-picture healthcare
needs of our members—from health conditions to their support system and environmental
factors that impact their overall well-being—and coordinate care with Primary Care Providers,
health plans and community resources. With advanced technology, innovative solutions, highly
skilled Nurse Practitioners and exceptional processes, Matrix excels at delivering the right
care, at the right place, by the right person…every time, improving the quality and cost of
healthcare. We are changing the way healthcare is delivered.
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FOR M 1 0 - K
PROVIDENCE SERVICE CORPOR ATION
2 0 14
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2014
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-34221
The Providence Service Corporation
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
86-0845127
(I.R.S. Employer Identification No.)
64 East Broadway Blvd.,
Tucson, Arizona
(Address of principal executive offices)
85701
(Zip code)
Registrant’s telephone number, including area code
(520) 747-6600
Securities registered pursuant to Section 12(b) of the Act:
Title of each Class
Common Stock, $0.001 par value per share
Name of each exchange on which registered
The NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☒ No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☒ No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter
period that the registrant was required to submit and post such files). ☒ Yes ☐ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☐
☐ (Do not check if a smaller reporting company)
Accelerated filer
Smaller reporting company
☒
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). ☐ Yes ☒ No
The aggregate market value of the voting and non-voting common equity of the registrant held by non-affiliates based on the closing price for such
common equity as reported on The NASDAQ Global Select Market on the last business day of the registrant’s most recently completed second fiscal quarter
(June 30, 2014) was $423.9 million.
As of March 10, 2015, there were outstanding 15,902,354 shares (excluding treasury shares of 1,016,879) of the registrant’s Common Stock, $.001
par value per share, which is the only outstanding capital stock of the registrant.
All or a portion of items 10 through 14 in Part III of this Form 10-K are incorporated by reference to our definitive proxy statement on Schedule 14A
for our 2015 stockholder meeting; provided that if such proxy statement is not filed on or before April 30, 2015, such information will be included in an
amendment to this Report on Form 10-K filed on or before such date.
DOCUMENTS INCORPORATED BY REFERENCE
TABLE OF CONTENTS
PART I
Page No.
Item 1. Business .........................................................................................................................................................
1
Item 1A.Risk Factors ...................................................................................................................................................
14
Item 1B. Unresolved Staff Comments ..........................................................................................................................
27
Item 2. Properties .......................................................................................................................................................
27
Item 3. Legal Proceedings ..........................................................................................................................................
27
Item 4. Mine Safety Disclosures ................................................................................................................................
27
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities ..................................................................................................................................................
28
Item 6. Selected Financial Data ..................................................................................................................................
31
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations .........................
33
Item 7A.Quantitative and Qualitative Disclosures About Market Risk .......................................................................
60
Item 8. Financial Statements and Supplementary Data ..............................................................................................
61
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure ........................ 102
Item 9A.Controls and Procedures ................................................................................................................................ 102
Item 9B. Other Information .......................................................................................................................................... 103
PART III
Item 10. Directors, Executive Officers and Corporate Governance ............................................................................. 104
Item 11. Executive Compensation ................................................................................................................................ 104
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters ....... 104
Item 13. Certain Relationships and Related Transactions, and Director Independence ............................................... 104
Item 14. Principal Accounting Fees and Services ........................................................................................................ 104
PART IV
Item 15. Exhibits, Financial Statement Schedules........................................................................................................ 105
SIGNATURES ............................................................................................................................................................. 111
EXHIBIT INDEX
i
Item 1.
Business.
Background
PART I
The Providence Service Corporation (“Providence”, the “Company”, “we”, or “us”), which was formed in 1997,
through its four business segments, provides and manages government sponsored non-emergency transportation (“NET”)
services, human services, workforce development (“WD”) services and health assessment (“HA”) services. With respect to
NET services, which operates under the Logisticare brand, we manage transportation networks and arrange for client
transportation to health care related facilities and services for state or regional Medicaid agencies, managed care organizations
(“MCOs”) and commercial insurers. With respect to our human services, our counselors, social workers and behavioral health
professionals work with clients who are eligible for government assistance due to income level, disabilities or court order.
With respect to our workforce development and justice services, provided primarily through Ingeus Proprietary Limited and
its wholly and partly-owned subsidiaries and associates (collectively, “Ingeus”), which we acquired during the second quarter
of 2014, we provide resume and job interview skills, networking and job placement services, and technical job training
through internally staffed or outsourced resources. Additionally, with respect to our health assessment services, provided
through CCHN Group Holdings, Inc. and its wholly-owned subsidiaries and affiliates (collectively, “Matrix”), which we
acquired during the fourth quarter of 2014,we provide comprehensive health assessments (“CHAs”), for Medicare Advantage
(“MA”) health plans, in members’ homes or nursing facilities.
Competitive Strengths
We believe the following competitive strengths uniquely position us to take advantage of the increase in the
privatization of government sponsored services, as well as the home and community based delivery of behavioral health and
other human services.
Leading market position and reputation
We believe we are the market leader in NET services, have a leading high-quality global workforce platform, are one
of the largest for-profit providers of home and community based behavioral health services and, with the addition of Matrix,
are the market leader in MA CHAs. We believe our market leadership and reputation for service quality in cost effective
settings position us to benefit from the increased government outsourcing and the shift to home and community based care.
Our broad footprint, as well as our local market density and knowledge, allows us to deliver a level of quality and
responsiveness that smaller service providers are not always able to offer. This quality and responsiveness, coupled with our
brand reputation and experienced management team, has allowed us to forge strong relationships with commercial business
partners and national, state, and county government agencies.
Scalable operating platform
We believe the operational infrastructure within each of our business segments provides a competitive advantage.
Unlike smaller competitors, we have developed a robust and scalable infrastructure, including functions such as quality
assurance, compliance, risk management, information technology, and bidding and contract management. This infrastructure
enables us to focus on efficiently delivering consistent, high-quality service and enables us to respond to the increasing
compliance, regulatory and fiscal requirements of our customers. Our NET Services and WD Services segments utilize
proprietary technology platforms to achieve efficiencies that are difficult for our competitors to match. These systems serve
as the primary operating platforms for these businesses, and allow for the effective management of provider networks,
enhanced reporting capabilities, and real-time detailed client tracking. We believe that the deployment of these technology
platforms facilitate timely and accurate assessments of our business performance, and allow us to track and respond to
identified trends efficiently. We believe that Matrix’s network of nurse practitioners (“NPs”) and a scalable operating
platform, supported by proprietary technology, represents a key competitive advantage in the market for CHAs.
Diversified program and payer mix
Providence consists of four discrete business segments, characterized by decentralized management and location-
specific service offerings. Our service offerings span NET, HA, and Human and WD services. Our payers include national,
state, county and other government bodies as well as managed care organizations. Our business segments utilize various
payment models including capitated, fee-for-service (“FFS”) and performance-based, which provide further revenue and cash
flow diversification.
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Ability to drive quality outcomes in low cost settings presents significant value proposition for payers and clients
Through our ability to design customized service plans that meet the unique needs of our clients in cost effective
settings, we believe we offer a powerful value proposition to our payers and, ultimate clients. Rising costs are driving payers
to shift away from costly facility based delivery and towards lower cost home, community and service center based delivery.
For example, in the US, in order to save costs, Medicaid spending on long-term care has been shifting towards lower cost
home and community based services. As a result, we estimate Medicaid home and community based services spending as a
percent of total Medicaid long- term services and support expenditures has grown from 18% in 1995 to 50% in 2012, and is
expected to continue growing. Internationally, there is a growing trend to shift the delivery of social services to the private
sector with strict accountability for measurable results. We believe we are well positioned to benefit from these trends, as we
provide a lower cost alternative for delivering social and medical care services, and drive high quality outcomes.
Positioned to benefit from emerging healthcare and social service trends
We believe we are well positioned to benefit from trends in healthcare, including the growth of Medicare, Medicaid
and dual eligible (individuals eligible for both Medicaid and Medicare) populations, the growth in MA plan enrollment,
development of integrated delivery models and increased focus on logistics management to improve patient access to
preventative and health management services. Increasingly, individuals in need of our services are living longer lives,
requiring additional care and in many cases outliving the ability to reside independently or with family caregivers. The
Medicaid population is also expanding as a result of healthcare reform. We expect to continue to expand our service lines to
meet these growing demands across all of our segments.
Business Strategy
Grow our volumes and expand our services in existing markets
We expect to leverage our market reputation and core competencies to capture growth opportunities embedded in our
current business platforms. Our core competencies include managing provider networks, tailoring services to community
needs, effective and efficient bidding and contracting processes, logistics management and designing service delivery models
to achieve superior outcomes. By enhancing and leveraging these core competencies, we believe we can benefit from
emerging trends in healthcare and human services.
Pursue opportunities in adjacent markets and complementary service lines
We have a proven track record of expanding both organically and through acquisitions into adjacent markets and we
intend to leverage our core competencies and relationships with national, state, and county governmental entities, as well as
commercial health plans to pursue additional expansion opportunities. We typically pursue organic and strategic expansion
into markets that are contiguous to our existing markets or where we believe we can quickly establish a significant presence.
In addition, we will continue to seek opportunities to cross-sell our services throughout our platform.
Increase returns on capital by enhancing our service offerings and improving performance
We believe we can continue to improve efficiencies and increase returns on capital by utilizing our expertise within our
existing programs and by capitalizing on our increasing scale. In addition, we will invest in strong markets and premium
products and programs while selectively exiting underperforming service lines, improving management systems, and
improving bidding and contracting discipline.
Drive long-term intrinsic value embedded in our recent acquisitions
We believe that there is opportunity to increase the intrinsic value of our 2014 acquisitions of Ingeus and Matrix. Ingeus
has a presence in ten countries outside the US, which substantially increases our international footprint. We intend to build
upon Ingeus’s successful track record of delivering value added services, as well as utilizing its reputation to enter new
international markets and service lines.
Additionally, we believe Matrix has multiple growth opportunities. We believe Matrix is well positioned to increase
CHA volumes within its existing MA customer base and to add new MA customers. Matrix’s offerings are extensible across
adjacent markets (Medicaid, dual eligible, and commercial), which, like the Medicare market, have a need to better assess,
stratify, and mitigate risk.
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Financial information about our segments
We operate in four segments, NET Services, Human Services, WD Services and HA Services. Financial information
about segments and geographic areas, including revenues, net income and long-lived assets of each segment and from
domestic and foreign operations for the Company as a whole is included in Note 19 of our consolidated financial statements
presented elsewhere in this report and is incorporated herein by reference. Additionally, see Item 1A, Risk Factors, for a
discussion of risks related to our foreign operations.
Business description
NET Services
Services offered. We are a provider of NET management services providing solutions to clients under 109 contracts in
39 states and the District of Columbia. We provide responsive and innovative solutions for a healthcare recipient’s covered
transportation benefit through centralized call processing, development and management of transportation networks through
the use of proprietary technologies. Our current payers include state Medicaid programs, local government agencies, hospital
systems and MCOs providing Medicare, Medicaid and commercial products. For 2014, 2013 and 2012, our NET services
accounted for 59.7%, 68.6% and 67.9%, respectively, of our consolidated revenue.
We provide services to a wide variety of people with varying needs. Our payers are primarily state Medicaid agencies
and MCOs. Our clients are typically Medicaid or Medicare eligible members, as defined by our payers, most of whom are
individuals with limited mobility, people with limited means of transportation and people with disabilities that prevent them
from using conventional methods of transportation. The majority of our programs provide NET services to Medicaid
members. Utilization rates and vehicle requirements differ depending on the individual’s condition, the location of the
individual relative to the final destination, and available transportation systems.
As a transportation logistics manager, we match transportation services with the recipient’s needs. We employ a
proprietary information technology platform and operational processes to manage the transportation services through a
contracted network of transportation providers. As such, we typically do not provide direct transportation to end users. Rather,
to fulfill requests under our contracts, we contract with local transportation providers, such as operators of multi-passenger
and wheelchair equipped vans, taxi companies and ambulance companies. We receive transportation requests from members
or their representatives, such as social workers, and arrange for the least costly and most effective transportation. We process
transportation requests by assigning local transportation providers out of one of our 28 call and/or regional support centers.
These decisions are aided by our proprietary logistics software. After we assign an appropriate transportation provider to the
member, we carefully monitor the transportation service provided to ensure that the transport was completed before we pay
the transportation vendor. We do not normally pay for services if the member does not show up for transport, or if the
transport is not completed. A majority of the requests for transportation are standing orders, mostly for patients who require
frequent, recurring services such as dialysis treatment. Most transportation requests are required to be scheduled with 48 to
72 hour advance notice, with a small number of requests scheduled on the same day, such as hospital discharges.
We contract with larger transportation companies as well as a number of diverse, small, local companies in order to
provide superior coverage in both urban and rural areas. As part of this comprehensive provider network management, we
provide access to third party screening and credentialing of drivers and transportation companies, provide program rule
orientation, and monitor performance on an ongoing basis through field audits, performance reporting and other reviews. We
typically use multiple transportation providers in each state, with an average provider fleet size of less than 10 vehicles. To
ensure compliance and safety quality standards for all transportation providers, we perform a credentialing process for all of
our network transportation providers who must meet minimum standards set by us and our payers. These standards include:
(i) successful completion of criminal and driving record checks; (ii) required drug testing; (iii) required driver and program
training on such topics as HIPAA, defensive driving, patient sensitivity, cultural diversity and first aid; (iv) both scheduled
and random inspections of provider owned and/or leased vehicles and communication systems; and (v) insurance coverage
that complies with contractual and statutory requirements. Our contracts with transportation providers are on a per completed
trip basis and do not contain volume guarantees. They can be cancelled without cause with 60 days’ notice.
Revenue and payers. We contract primarily with state and local government entities and MCOs. Approximately 80.9%
of our NET services revenue in 2014 was generated under capitated contracts where we assume the responsibility of meeting
the covered transportation requirements of a specific geographic population. These contracts are generally structured with
fixed per member, per month payment rates based on a defined scope of work and population to be served. Typical state
payer contracts are for three to five years with renewal options and range in size from approximately $2 million to $150
million annually. Approximately 5.7% of our NET services revenue is derived from FFS contracts and approximately 8.5%
is derived from flat fee contracts.
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We generate a significant portion of our revenue from a few payers. We derived approximately 17.0%, 15.3% and
15.2% of our NET services revenue from our contract with the State of New Jersey for the years ended December 31, 2014,
2013 and 2012, respectively. Additionally, we derived approximately 8.2%, 9.2% and 9.6% of our NET services revenue
from our contract with the State of Virginia’s Department of Medical Assistance Services for the years ended December 31,
2014, 2013 and 2012, respectively. Our next three largest payers in the aggregate comprised approximately 18.0%, 19.2%
and 18.4% of our NET services revenue for the years ended December 31, 2014, 2013 and 2012, respectively.
Our contracted per member, per month fee is predicated on actual historical transportation data for a defined population
and geographical region, future assumptions on key cost and program drivers, actuarial analysis performed in-house as well
as by third party actuarial firms and actuarial analysis provided by our payers. Our contract pricing is regularly reevaluated
and may be reset based on actual experience under the contract, with adjustments for membership fluctuations and inflation
factors such as cost of labor, fuel, insurance and utilization increases and decreases stemming from program re-designs.
Seasonality. The quarterly operating income and cash flows of our NET Services segment normally fluctuate as a result
of seasonal variations in the business, principally due to lower client demand for NET services during the holiday and winter
seasons. Due to the fixed revenue stream and variable expense base structure of our NET Services operating segment,
expenses typically vary with these changes and, as a result, such expenses fluctuate on a quarterly basis. We expect quarterly
fluctuations in operating income and cash flows to continue as a result of the seasonal demand for NET services.
Competition. We compete with a variety of organizations that provide similar NET services to Medicaid eligible
beneficiaries in local markets, such as American Medical Response, Inc., Medical Transportation Management Inc., and
SoutheasTrans., as well as a host of local and regional transportation providers. Most local competitors may seek to win
contracts for specific counties or small geographic territories whereas we and the larger competitors listed above seek to win
contracts for an entire state or large regional area. Historically, we have been successful in competitively bidding our NET
management services for state-wide or other large Medicaid population programs, as well as specialized NET benefits often
offered to populations covered by MCOs. We compete based on our technical expertise and experience, which is delivered
in a high service, competitive price environment, although we are not necessarily the lowest priced management service
provider in many instances. We have experienced, and expect to continue to experience, competition from new entrants into
our markets that may be willing to provide services at a lower cost. Regardless of how well we perform under our contracts
(based on service or cost), we face competitive rebid situations from time to time. Increased competitive pressure could result
in pricing pressures, loss of or failure to gain market share or loss of payers, any of which could harm our business.
Business development. With respect to our NET services sales and marketing strategy, we focus on providing
information to key legislators and agency officials. We pursue potential opportunities through various methods including
engaging lobbyists to assist in tracking legislation and funding that may impact NET programs, and monitoring state websites
for upcoming requests for proposals (“RFPs”). In addition, we generate new business leads through trade shows and
conferences, referrals, the Internet and direct marketing. The sales cycle usually takes between 6 to 24 months and there are
various decision makers who provide input into the decision to outsource. By providing valuable information to key
legislators and agency officials and creating a strong presence in the regions we serve, we are able to solidify the chance of
renewal when contract terms expire. Additional payers are targeted within existing states in order to leverage pre-existing
provider networks, technology, office and human resources investments. Furthermore, we target key commercial accounts
which we define as accounts that are growing and located in multiple geographic areas.
In many of the states where we have regional contracts, we seek to expand to include additional regions in these states
and in contiguous states. All decisions about which RFPs to consider are centralized and selectively targeted based on our
goals and service capabilities. Medicaid NET Services contracts with state agencies and larger Medicaid MCOs represent the
largest source of our NET Services revenue.
Human Services
Services offered. We primarily provide home and community based services and foster care services. The following describes
these services:
Home and community based counseling
• Home based and intensive home based counseling. Our home based counselors are trained professionals or para-
professionals providing counseling services in the client’s own home. These services average five hours per client
per week and can include individual, group or family sessions. Topics are prescriptive to each client and can include
family dynamics, peer relationships, anger management, substance abuse prevention, conflict resolution and parent
effectiveness training.
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We also provide intensive home based counseling, which consists of up to 20 or more hours per client per week. Our
intensive home based counselors are masters or Ph.D. level professional therapists or counselors. Intensive home
based counseling is designed for clients struggling to cope with everyday situations. Our counselors are qualified to
assist with marital and family issues, depression, drug or alcohol abuse, domestic violence, hyperactivity, criminal
or anti-social behavior, sexual misbehavior, school expulsion or chronic truancy and other disruptive behaviors. In
the absence of this type of counseling, many of these clients would be considered for 24-hour institutional care or
incarceration.
• Substance abuse treatment services. Our substance abuse treatment counselors provide services in the office, home
and counseling centers designed especially for clients with drug or alcohol abuse problems. Our counselors use peer
contacts, treatment group process and a commitment to sobriety as treatment methods. Our professional counseling,
peer counseling and group and family sessions are designed to introduce clients dependent upon drugs or alcohol to
a sober lifestyle.
• School support services. Our professional counselors are assigned to and stationed in public schools to assist in
dealing with problematic and at-risk students. Our counselors provide support services such as teacher training,
individual and group counseling, logical consequence training, anger management training, gang awareness and drug
and alcohol abuse prevention techniques. In addition, we provide in-home educational tutoring in numerous markets
where we contract with individual school districts to assist students who need assistance in learning.
• Correctional services. We provide private probation supervision services, including monitoring and supervision of
those sentenced to probation, rehabilitative services, and collection and disbursement of court-ordered fines, fees
and restitution.
• Workforce development. We assist individuals in obtaining and retaining meaningful employment through services
that include vocational evaluation, job placement, skills training, and employment support. These services are offered
in the United States (“US”) and Canada.
For 2014, 2013 and 2012, our home and community based services represented approximately 21.6%, 27.2% and
28.0%, respectively, of our consolidated revenue.
Foster care
• Foster care. We recruit and train foster parents and license family foster homes to provide 24-hour care to children
who have been removed from their homes due to physical or emotional abuse, abandonment, or the lack of
appropriate living situations. We place individual children and, when possible, sibling groups, in a licensed home.
Each child is provided 24-hour care and supervision by trained foster parents. Our professional staff and counselors
match and supervise the child and foster family. We also provide tutoring and other services to the child and foster
family.
• Therapeutic foster care. We provide therapeutic foster care services. This is a 24-hour care service designed for
children exhibiting serious emotional problems who may otherwise require institutional treatment. We recruit,
license and train professional foster parents to care for foster children for up to a year of therapeutic intervention.
Social, psychological and psychiatric services are provided on a prescriptive basis to each child and therapeutic
foster care family by a team of licensed, professional staff.
Revenue and payers. Substantially all of our revenue related to our Human Services operating segment is derived from
contracts with state or local government agencies and government intermediaries.
Fee-for-service contracts
The majority of our contracts are negotiated FFS arrangements with payers. Home and community based services are
generally payable by the hour depending on the type and intensity of the service. Foster care services are generally payable
pursuant to a fixed monthly fee. Approximately 76.0%, 72.0% and 72.5% of our Human Services operating segment revenue
for the fiscal years ended December 31, 2014, 2013 and 2012 were FFS arrangements. A significant number of our FFS
contracts allow the payer to terminate the contract immediately for cause, such as for our failure to meet our contract
obligations. Additionally, these contracts typically permit the payer to terminate the contract at any time prior to its stated
expiration date without cause, at will and without penalty to the payer, either upon the expiration of a short notice period,
typically 30 days, or immediately, in the event federal or state appropriations supporting the programs serviced by the contract
are reduced or eliminated.
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We generate a significant portion of our revenue from a few payers. Under our contract with the State of Virginia’s
Department of Medical Assistance Services, we derived approximately 10.6%, 11.1% and 10.1% of our Human Services
segment revenue for the years ended December 31, 2014, 2013 and 2012, respectively.
Cost-based service contracts
Revenues from our cost-based service contracts are generally recorded based on a combination of direct costs, indirect
overhead allocations, and stated contractual margins on those incurred costs. These revenues are compared to annual contract
budget limits and, depending on reporting requirements, reductions of revenue may be recorded for certain contingencies.
This results in revenue from these contracts being recorded based on allowable costs incurred. The annual contract amount
is based on projected costs to provide services under the contracts with adjustments for changes in the total contract amount.
Annually, we submit projected costs for the coming year which assist the contracting payers in establishing the annual
contract amount to be paid for services provided under the contracts. We submit monthly cost reports which are used by the
contracting payers to determine the amount, if any, by which funds paid to us for services provided under the contracts were
greater than the allowable costs to provide these services. Completion of this review process may range from one month to
several years from the date we submit the cost report. In cases where funds paid to us exceed the allowable costs to provide
services under contract, we may be required to pay back the excess funds.
Our cost reports are routinely audited by our contracted payers on an annual basis. We periodically review our
provisional billing rates and allocation of costs and provide for estimated adjustments from the contracting payers. We believe
that adequate provisions have been made in our consolidated financial statements for any adjustments that might result from
the outcome of any cost report audits. Differences between the amounts provided and the settlement amounts are recorded in
our consolidated statement of income in the year of settlement. Cost-based service contracts represented approximately
19.0%, 20.3% and 18.6% of our Human Services operating segment revenue for the years ended December 31, 2014, 2013
and 2012.
Block purchase (capitated) contract
We also provide certain services under an annual block purchase contract. We are required to provide or arrange for
behavioral health services to eligible populations of beneficiaries as defined in the contract. We must provide a complete
range of behavioral health services, including clinical, case management, therapeutic and administrative. We are obligated to
provide services only to those clients with a demonstrated medical necessity. There is no contractual limit to the number of
eligible beneficiaries that may be assigned to us, or a limit to the level of services that must be provided to these beneficiaries
if the services are deemed to be medically necessary. Therefore, we are at-risk if the costs of providing necessary services
exceed the associated reimbursement under the contractual arrangement. However, during the years ended December 31,
2014, 2013 and 2012, the eligible beneficiaries that were assigned to us did not exceed our budgeted expectations for those
years. The terms of the contract typically are reviewed prospectively and amended as necessary to ensure adequate funding
of our service offerings under the contract; however, no assurances can be made that such funding will adequately cover the
costs of services previously provided. The annual block purchase contract represented 4.6%, 5.4% and 5.4% of our Human
Services operating segment revenue for the years ended December 31, 2014, 2013 and 2012, respectively.
Seasonality. Our quarterly operating results and operating cash flows normally fluctuate as a result of seasonal
variations in our Human Services operating segment, principally due to lower client demand for our home and community
based services during the holiday and summer seasons. As our business has grown, our exposure to seasonal variations has
also grown, and will continue to grow, particularly with respect to our school based, educational and tutoring services.
Because the majority of our contracts are FFS, we experience lower home and community based services revenue when
school is not in session. Our operating expenses, however, which are comprised largely of payroll and related costs, do not
vary significantly with these changes. As a result, our Human Services operating segment experiences lower operating
margins during the holiday and summer seasons. We expect quarterly fluctuations in operating results and operating cash
flows to continue as a result of the seasonal demand for our home and community based services.
Competition. The human services industry is a highly fragmented industry. We compete for clients with a variety of
organizations that offer similar services. Most of our competition consists of local human services organizations that compete
with us for local contracts, such as agencies supported by the United Way, and faith-based agencies such as Catholic Social
Services, Jewish Family and Children’s Services and the Salvation Army. Other competitors include local not-for-profit
organizations and community based organizations. Historically, these types of organizations have been favored in our
industry as incumbent providers of services to government entities. On a national level, there are very few organizations that
compete for local, county and state contracts to provide the types of services we offer. We also compete with larger
companies, such as Res-Care, Inc., which provides support services, training and educational programs predominantly to
Medicaid eligible beneficiaries. National Mentor, Inc. is the country’s largest provider of foster care services and competes
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with us in certain markets for foster care services. Many institutional providers offer some type of community based care
including such organizations as The GEO Group, Inc. and The Devereaux Foundation. While we believe that we compete on
the basis of price and quality, many of our competitors have greater financial, technical, political and marketing resources,
name recognition, and a larger number of clients and payers than we do. In addition, some of these organizations offer more
services than we do. We have experienced, and expect to continue to experience, competition from new entrants into our
markets. Increased competition may result in negative pricing pressures, loss of or failure to gain market share or loss of
clients or payers.
Business development. Substantially all of our marketing is performed at the local and regional level. Through our local
and regional managers, we have successfully developed and maintained extensive relationships with various payers. These
relationships allow us to develop leads on new business, cross-sell our other services to existing payers and negotiate payer
contracts. A significant portion of our business is procured in this manner. We also seek to market our services to payers in
geographical areas contiguous to existing markets and in which we believe our reputation as a low cost quality service
provider will enhance our ability to compete for and win business. From time to time we respond to RFPs. Additionally, we
subscribe to a service that keeps us informed of and tracks on a national basis RFPs for privatization of human services. We
selectively choose the RFPs to which we respond based upon whether our reputation enhances our ability to compete or if
the RFP presents a unique opportunity to develop a new service offering.
WD Services
Services offered. Through Ingeus, we provide workforce development services that include resume and job interview
skills, networking and job placement services, and technical job training through internally staffed or outsourced resources.
Our end-user client base is broad, and includes long-term unemployed, disabled, and unskilled individuals, as well as
individuals that cope with medical illnesses, are newly graduated from educational institutions, and those that have been
released from incarceration for an extended length of time. As of December 31, 2014, our WD Services segment operates
across ten countries, including Australia, France, Germany, Poland, Saudi Arabia, South Korea, Spain, Sweden, Switzerland
and the United Kingdom.
Revenue, payers and clients. We contract primarily with national government entities that seek to reduce the
unemployment rate generally, or for specific targeted cohorts. For the year ended December 31, 2014, approximately 77.6%
and 9.4% of our WD Services revenue and consolidated revenue, respectively, was derived from operations in the United
Kingdom. The nature of services offered by our WD Services segment may require significant upfront capital and operating
cost outlays upon contract award, while revenues may be payable in large part only after incentive measures are achieved or
the clients’ continued employment for a substantial period of time has been established. Further, the level of funding required
is dependent upon the size and nature of the contract, and the timing of revenue recognition will vary based upon contract
terms. Because of these two factors, there can be significant variability in our earnings from quarter to quarter, and from year
to year. Our legacy workforce development services not related to Ingeus are included in the Human Services segment for
the years ended December 31, 2014, 2013 and 2012.
Seasonality. While there has been period-to-period variability in the Ingeus earnings due to the factors set forth in
Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations – How We Earn our
Revenue – WD Services,”, there has not been a material seasonal effect on Ingeus’s results of operations.
Competition. The international workforce development market is comprised primarily of large multi-national
corporations that provide a wide range of human resource, networking and job placement services, and smaller niche
companies that generally provide services to an individual country or a small host of countries. Our larger competitors include
Maximus, Manpower, Adecco, Randstad, G4S and Serco. We believe we have been successful bidding for large, nationwide
contracts, and have also focused on significant contracts that cover smaller geographic regions within various countries.
While our larger competitors also have deployed the same strategy, we believe we have been successful competing based on
our reputation for past success, high level of professionalism and service delivery, and demonstrated expertise in our market
space. While we are not always the lowest priced competitor in all situations, we do experience price pressure during the bid
process, and sometimes post-bid when a contract is up for renewal. Increased competitive pressure could result in negative
pricing pressures, loss of or failure to gain market share or loss of payers.
Business development. Our business development activities for our international workforce development business are
performed at both the local country level as well as centrally in the WD Services segment headquarters in London. Through
local and global networks and relationships, we become aware of new opportunities for which we develop bids through the
RFP process. The nature of the RFP process varies from highly competitive to being one of a few, or the sole, service provider
to bid on a contract. We market heavily on our past successes and performance, as well as competitive pricing. Our primary
focus is building large, national contract bases, but we also have begun to expand into more regional markets within countries
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where we currently operate. Through local and international formal and informal lobbying efforts, we provide educational
information to government officials regarding the economic efficiency of workforce development privatization. We perform
extensive profitability and service delivery modeling before entering bids, and selectively choose which opportunities to
pursue.
HA Services
Services offered. Through Matrix, we deliver CHAs and related services through a national network of approximately
800 NPs located in communities throughout 33 states. Matrix’s model of delivering services through an employed network
of NPs affords greater control, uniformity, and consistency in managing and training providers to deliver high quality services
for its customers and their members. The NPs also reside in the same geographic area as the beneficiaries they serve,
considerably improving their knowledge and access to medical and community based services.
Matrix’s CHAs are conducted at the member’s home or residential facility. Unlike a typical 8 to 15 minute office visit
with a physician or physician’s assistant, which is often singularly focused on a specific symptom or condition, Matrix NPs
spend up to 60 minutes with each member and any of the member’s family members or caregivers he or she chooses. The
CHA is comprehensive and is comprised of a number of distinct components. In addition to checking vital signs and
performing a physical examination, Matrix NPs review the member’s health history and medical prescriptions, conduct a
depression screening, evaluate the immediate residential setting for any physical safety issues, review recommended
screening tests, and conduct a series of geriatric screens for fall risks, nutrition, and cognitive function. As the evaluation is
intended to provide a complete clinical assessment, Matrix NPs are also trained to record all diagnoses of medical conditions.
The data collected during the CHA is captured electronically in real-time in a portable tablet that each NP brings to the
member’s residence. The CHA process is also specifically designed to engage and coordinate with the member’s care network
to facilitate follow-up care and treatment. Following each CHA, educational and clinical information is shared with the
member, provider and MA plan to identify and close gaps in care. The CHA measures MA plan liability and assists in
determining risk adjusted payments made by Medicare to the MA plan. In addition to identifying opportunities to improve
and optimize care, Matrix’s service offering can deliver immediate impact on care outcomes.
Revenue, payers and clients. As of December 31, 2014, Matrix customers included approximately 34 MA plans,
including for profit multi-state MA plans and non-profit MA plans that operate in only one state or several counties within
one state. Matrix serves many of the largest and most prestigious health plans and health systems in the US. From
October 23, 2014 to December 31, 2014, Matrix’s top five customers accounted for approximately 70.8% of its revenue, and
its largest customer accounted for about 43.2% of its revenue. Matrix enters into annual or multi-annual contracts with its
customers under which it is paid on a per assessment basis.
Seasonality. CHAs are typically provided as part of MA plan’s annual program and are conducted with an individual
member once per year. Historically, Matrix has experienced higher CHA volume in the second half of the calendar year as a
result of an accelerating demand towards year-end from its existing customers and Matrix’s growing customer base.
Competition. We believe that Matrix and CenseoHealth are the largest providers of CHAs to the MA market. There are
many smaller volume competitors, including EMSI Healthcare Services, MedXM, and Inovalon, Inc. Some MA plans
internally provide CHA services for their members. The foundation of Matrix’s CHA programs is a network of full-time,
community-based NPs. Matrix believes that this network provides a competitive advantage versus alternative models that
rely upon a subcontracted network of part-time staff. Matrix’s employed network of community-based NPs and supporting
management and infrastructure results in consistency, quality, and compliance in the delivery of CHAs and care management.
Matrix’s services are often priced at a premium relative to its competitors, and Matrix believes it will continue to maintain a
pricing differential as result of: (i) Matrix’s national footprint across 33 states, (ii) Matrix’s sophisticated stratification
techniques to identify gaps in data and care, (iii) Matrix’s multi-channel member engagement capabilities, (iv) the benefits
of Matrix’s full-time, dedicated, community based NPs, (v) Matrix’s greater control, uniformity and consistency in delivering
high quality services for beneficiaries, and (vi) Matrix’s ability to execute and deliver the assessment goals of its customers.
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Business development. The Affordable Care Act (“ACA”) expansion is creating significant opportunities for growth
as risk-bearing healthcare organizations have an increasing need to assess, stratify, and ultimately mitigate the risk of member
populations. In particular, the rapidly evolving healthcare industry landscape is expanding the market opportunity for CHAs
across the following populations:
• Medicaid Expansion. At least 24 states use a risk adjustment model to adjust Medicaid Managed Care payments
to health plans. The prevalence of risk adjustment in Medicaid is expected to expand as states need to create
equitable incentives for plans to serve high-risk individuals in managed care as well as drive improvements in
care quality. According to Centers for Medicare & Medicaid Services (“CMS”), the number of Medicaid enrollees
is projected to grow approximately 5% per year to 77 million by 2020, largely driven by the ACA.
• Commercial Individual and Small Group Markets. Risk adjustment is a key component of the ACA-driven
commercial markets. The continued expansion of coverage across higher risk demographics and the potential for
adverse selection on public exchanges will require risk adjustment and sophisticated risk management capabilities.
Non-grandfathered plans in the individual and small group markets, both on and off exchange, are subject to risk
adjustment that began in 2014. By 2020, the Congressional Budget Office estimates that the individual exchange
market will grow to serve 25 million individuals, up from the CMS-reported 8 million that enrolled in the first
open enrollment season.
• Dual Eligible Population. Dual eligible individuals are those who are eligible for both Medicare and Medicaid.
Given the cost and complexity of the dual eligible population, new member navigation, clinical screenings, health
assessments and ongoing member engagement are critical to driving quality outcomes at a lower cost. There are
more than nine million dual eligible beneficiaries. That group represents approximately $300 billion, or 10% of
total healthcare expenditures. Approximately 40% of duals suffer from both physical and mental diseases, and
these co-morbid conditions further complicate and add to the cost of care. With the anticipated expansion of
Medicaid, the dual eligible market is also expected to increase, creating a large opportunity for Matrix to assist
managed care plans in managing this high-cost population.
Employees
As of December 31, 2014, we conducted our operations with approximately 13,700 clinical, client service
representatives and administrative personnel.
We believe that our employee relations are good because we offer competitive compensation, including stock-based
compensation to key employees, training, education assistance and career advancement opportunities. By offering
competitive compensation and benefit packages to our employees, we believe we are able to consistently deliver high quality
service, recruit qualified candidates and increase employee confidence, satisfaction and retention.
Regulatory Environment
Overview. We are subject to numerous federal, state and local laws and regulations. These laws and regulations
significantly affect the way in which we operate various aspects of our business. We must also comply with state and local
licensing requirements and requirements for participation in Medicare, Medicaid, federal block grant requirements,
requirements of various state Children’s Health Insurance Programs (“CHIP”), requirements for contracting with MA plans,
and contractual requirements imposed upon us by the state and local agencies with which we contract for such health care
and human services. CHIP is a federal program providing benefits administered by states that submit plans for health benefits
for children whose parents meet certain financial needs tests. Failure to follow the rules and requirements of these programs
can significantly affect our ability to be paid for the services we provide.
In addition, our revenue is largely derived from contracts that are directly or indirectly paid or funded by government
agencies, including Medicare and Medicaid. A significant decline in expenditures, or shift of expenditures or funding, could
cause payers to reduce their expenditures under those contracts or not renew such contracts, either of which could have a
negative impact on our future operating results. As funding for our contracts is dependent in part upon federal funding, such
funding changes could have a significant effect on our business.
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The healthcare industry is highly regulated and the federal and state laws that affect our business are significant. Federal
law and regulations are based primarily upon the Medicare and Medicaid programs, each of which is financed, at least in
part, with federal money. State jurisdiction is based upon a state’s authority to license certain categories of healthcare
professionals and providers and the state’s interest in regulating the quality of healthcare in the state, regardless of the source
of payment. The significant areas of federal and state regulatory laws that may affect our business, include, but are not limited
to the following:
false and other improper claims;
•
• HIPAA and its privacy, security, breach notification and enforcement and code set regulations, along with
evolving state laws protecting patient privacy and requiring notifications of unauthorized access to, or use of,
patient medical information;
civil monetary penalties law;
anti-kickback laws;
the Stark Law and other self-referral and financial inducement laws;
•
•
•
• CMS regulations pertaining to Medicare as well as CMS releases applicable to the operation of MA plans,
such as reimbursement rates, risk adjustment methodologies, adjustments to quality management
measurements and other relevant factors; and
state licensure laws.
•
A violation of any laws could result in civil and criminal penalties, the refund of monies paid by government and/or
private payers, our exclusion from participation in federal healthcare payer programs, and/or the loss of our license to conduct
business within a particular state’s boundaries. Although we believe that we are able to maintain material compliance with
all applicable laws, these laws are complex and a review of our practices by a court, or applicable law enforcement or
regulatory authority, could result in an adverse determination that could harm our business. Furthermore, the laws applicable
to our business are subject to change, interpretation and amendment, which could adversely affect our ability to conduct our
business.
Federal Law. Federal healthcare laws apply in any case in which we are providing an item or service that is reimbursable
by a federal healthcare payer program. The principal federal laws that affect our business include those that prohibit the filing
of false or improper claims with federal healthcare payer programs and those that prohibit unlawful inducements for the
referral of business reimbursable under federal healthcare payer programs.
False and Other Improper Claims. Under the federal False Claims Act (31 U.S.C. §§ 3729-3733) and similar state laws,
the government may impose civil liability on us if we knowingly submit, or participate in submitting, any claims for payment
to the federal or state government that are false or fraudulent, or that contain false or misleading information. Liability can
be incurred not only for submitting false claims with actual knowledge, but also for doing so with reckless disregard or
deliberate ignorance. In addition, knowingly making or using a false record or statement to receive payment from the federal
government is also a violation. Recent amendments to the False Claims Act expand liability by eliminating any requirement
that a false claim be submitted, or a false record or statement be made, directly to the government. The amendments also
create new liability for “knowingly and improperly avoiding or decreasing an obligation to pay or transmit money or property
to the government.” Consequently, a provider need not take an affirmative action to conceal or avoid an obligation to the
government, but the mere retention of an overpayment from the government could lead to potential liability under the False
Claims Act.
If we are ever found to have violated the False Claims Act, we could be required to make significant payments to the
government (including damages and penalties in addition to the return of reimbursements previously collected) and could be
excluded from participating in federal healthcare programs. Many states also have similar false claims statutes. In addition,
healthcare fraud is a priority of the US Department of Justice, Office of Inspector General and the Federal Bureau of
Investigation and state Attorneys General. These agencies have devoted a significant amount of resources to investigating
healthcare fraud.
While the criminal statutes generally are reserved for instances evidencing fraudulent intent, the civil and administrative
penalty statutes are being applied by the federal government in an increasingly broad range of circumstances. Examples of
the types of activities giving rise to liability for filing false claims include billing for services not rendered, misrepresenting
services rendered (i.e., mis-coding) and applications for duplicate reimbursement. Additionally, the federal government takes
the position that a pattern of claiming reimbursement for unnecessary services violates these statutes if the claimant should
have known that the services were unnecessary. The federal government also takes the position that claiming reimbursement
for services that are substandard is a violation of these statutes if the claimant should have known that the care was
substandard. Criminal penalties also are available in the case of claims filed with private insurers if the federal government
shows that the claims constitute mail fraud or wire fraud or violate any of the federal criminal healthcare fraud statutes.
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State Medicaid agencies and state Attorneys General also have authority to seek criminal or civil sanctions for fraud
and abuse violations. In addition, private insurers may bring actions under state false claim laws. In certain circumstances,
federal and state laws authorize private whistleblowers to bring false claim or “qui tam” suits on behalf of the government
against providers and reward the whistleblower with a portion of any final recovery. In addition, the federal government has
engaged a number of private audit organizations to assist it in tracking and recovering false claims for healthcare services.
Governmental investigations and whistleblower “qui tam” suits against healthcare companies have increased
significantly in recent years, and have resulted in substantial penalties and fines. Although we monitor our billing practices
for compliance with applicable laws, such laws are very complex, and we might not be able to detect all errors or interpret
such laws in a manner consistent with a court or an agency’s interpretation.
Health information practices
Under HIPAA, the US Department of Health and Human Services, or DHHS, issued rules to define and implement
standards for the electronic transactions and code sets for the submission of transactions such as claims, and privacy and
security of individual health information in whatever manner it is maintained.
In February 2006, DHHS published its Final Rule on Enforcement of the HIPAA Administrative Simplification
provisions, including the transaction standards, the security standards and the privacy rule. This enforcement rule addresses,
among other issues, DHHS’s policies for determining violations and calculating civil monetary penalties, how DHHS will
address the statutory limitations on the imposition of civil monetary penalties, and various procedural issues. The rule extends
enforcement provisions currently applicable to the health care privacy regulations to other HIPAA standards, including
security, transactions and the appropriate use of service code sets.
On February 17, 2009, the Health Information Technology for Economic and Clinical Health Act, (“HITECH”), was
enacted as part of the American Recovery and Reinvestment Act of 2009 to, among other things, extend certain of HIPAA’s
obligations to parties providing services to health care entities covered by HIPAA known as “business associates,” impose
new notice of privacy breach reporting obligations, extend enforcement powers to state attorney generals and amend the
HIPAA privacy and security laws to strengthen the civil and criminal enforcement of HIPAA, establishing four categories of
violations that reflect increasing levels of culpability, four corresponding tiers of penalty amounts that significantly increase
the minimum penalty amount for each violation, and a maximum penalty amount of $1.5 million for all violations of an
identical provision. With the additional HIPAA enforcement power under HITECH, the Office of Civil Rights of the
Department of Health and Human Services and states are increasing their investigations and enforcement of HIPAA
compliance. We have taken steps to ensure compliance with HIPAA and we are monitoring compliance on an ongoing basis.
Lastly, on January 17, 2013, DHHS released the HITECH Final Rule. The HITECH Final Rule imposes various new
requirements on covered entities and business associates, and also expands the definition of “business associates.” The
various requirements of the HITECH Final Rule must be implemented before certain transition period deadlines. The final
deadline in the transition period was September 24, 2014. We will continue to assess our compliance obligations as
regulations under HIPAA as modified by HITECH, continue to become effective as more guidance becomes available from
DHHS and other federal agencies. The evolving privacy and security requirements, however, may require substantial
operational and systems changes, associate education and resources and there is no guarantee that we will be able to
implement them adequately or prior to their effective date. Given HIPAA’s complexity and the evolving regulations, which
may be subject to changing and perhaps conflicting interpretation, our ongoing ability to comply with all of the HIPAA
requirements is uncertain, which may expose us to the criminal and increased civil penalties provided under HITECH and
may require us to incur significant costs in order to seek to comply with its requirements.
Federal and state anti-kickback laws
Federal law commonly known as the “Anti-Kickback Statute” prohibits the knowing and willful offer, solicitation,
payment or receipt of anything of value (direct or indirect, overt or covert, in cash or in kind) which is intended to induce:
the referral of an individual for a service for which payment may be made by Medicare, Medicaid or certain other federal
healthcare programs; or the ordering, purchasing, leasing, or arranging for, or recommending the purchase, lease or order of,
any service or item for which payment may be made by Medicare, Medicaid or certain other federal healthcare programs.
Interpretations of the Anti-Kickback Statute have been very broad and under current law, courts and federal regulatory
authorities have stated that this law is violated if even one purpose (as opposed to the sole or primary purpose) of the
arrangement is to induce referrals. Even bona fide investment interests in a healthcare provider may be questioned under the
Anti-Kickback Statute if the government concludes that the opportunity to invest was offered as an inducement for referrals.
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This act is subject to numerous statutory and regulatory “safe harbors.” The safe harbor regulations, however, do not
cover all lawful relationships between healthcare providers and referral sources. Failure of an arrangement to satisfy all of
the requirements of a particular safe harbor does not mean that the arrangement is unlawful. However, it may mean that such
an arrangement will be subject to scrutiny by the regulatory authorities.
While we believe that our operations are in compliance with applicable Medicare and Medicaid fraud and abuse laws,
there can be no guarantee. We seek to structure all applicable arrangements to comply with applicable safe harbors where
reasonably possible. There is a risk however, that the federal government might investigate such arrangements and conclude
they violate the Anti-Kickback Statute. If our arrangements are found to violate the Anti-Kickback Statute, we, along with
our clients would be subject to civil and criminal penalties, which may include exclusion from participation in government
reimbursement programs, and our arrangements would not be legally enforceable, which could materially and adversely
affect our business.
Many states, including some where we do business, have adopted anti-kickback laws that are similar to the federal Anti-
Kickback Statute. Some of these state laws are very closely patterned on the federal Anti-Kickback Statute; others, however,
are broader and reach reimbursement by private payers. If our activities were deemed to be inconsistent with state anti-
kickback or illegal remuneration laws, we could face civil and criminal penalties or be barred from such activities, any of
which could harm our business.
Federal and State Self-Referral Prohibitions
We may be subject to federal and state statutes banning payments for referrals of patients and referrals by physicians
to healthcare providers with whom the physicians have a financial relationship. Section 1877 of the Social Security Act, also
known as the “Stark Law”, prohibits physicians from making a “referral” for “designated health services” for Medicare (and
in many cases Medicaid) patients from entities or facilities in which such physicians directly or indirectly hold a “financial
relationship”.
A financial relationship can take the form of a direct or indirect ownership, investment or compensation arrangement.
A referral includes the request by a physician for, or ordering of, or the certifying or recertifying the need for, any designated
health services.
Certain services that we provide may be identified as “designated health services” for purposes of the Stark Law. We
cannot provide assurance that future regulatory changes will not result in other services we provide becoming subject to the
Stark Law’s ownership, investment or compensation prohibitions in the future.
Many states, including some states where we do business, have adopted similar or broader prohibitions against
payments that are intended to induce referrals of clients. Moreover, many states where we operate have laws similar to the
Stark Law prohibiting physician self-referrals. We contract with a significant number of human services providers and
practitioners, including therapists, physicians and psychiatrists, and arrange for these individuals or entities to provide
services to our clients. While we believe that these contracts are in compliance with the Stark Law, no assurance can be made
that such contracts will not be considered in violation of the Stark Law.
Healthcare Reform. On March 23, 2010, the President of the United States signed into law comprehensive health reform
through the Patient Protection and Affordable Care Act (Pub. L. 11-148) (“PPACA” or “ACA”). On March 30, 2010, the
President signed a reconciliation budget bill that included amendments to the PPACA (Pub. L. 11-152). These laws in
combination form the “Health Care Reform Act” referred to herein. The changes to various aspects of the healthcare system
in the Health Care Reform Act are far-reaching and include, among many others, substantial adjustments to Medicare
reimbursement, establishment of individual mandates for healthcare coverage, extension of coverage to certain populations,
expansion of Medicaid and CHIP, restrictions on physician-owned hospitals, and increased efficiency and oversight
provisions.
Some of the provisions of the Health Care Reform Act took effect immediately, while others will take effect later or
will be phased in over time, ranging from a few months following approval to ten (10) years. Due to the complexity of the
Health Care Reform Act, it is likely that additional legislation will be considered and enacted. The Health Care Reform Act
requires the promulgation of regulations that will likely have significant effects on the health care industry and third party
payers. Thus, the healthcare industry and our operations may be subjected to significant new statutory and regulatory
requirements and contractual terms and conditions, and consequently to structural and operational changes and challenges.
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The Health Care Reform Act also implements significant changes to healthcare fraud and abuse laws that will intensify
the risks and consequences of enforcement actions. These include expansion of the False Claims Act by: (a) narrowing the
public disclosure bar; and (b) explicitly stating that violations of the Anti-Kickback Statute trigger false claims liability. In
addition, the Health Care Reform Act lessens the intent requirements under the Anti-Kickback Statute to provide that a person
may violate the statute without knowledge or specific intent. The Health Care Reform Act also provides new funding and
expanded powers to investigate fraud, including through expansion of the Medicare Recovery Audit Contractor (RAC)
program to Medicare Parts C and D and Medicaid and authorizing the suspension of Medicare and Medicaid payments to a
provider of services pending an investigation of a credible allegation of fraud. Finally, the legislation creates enhanced
penalties for noncompliance, including increased criminal penalties and expansion of administrative penalties under Medicare
and Medicaid. Collectively, such changes could have a material adverse impact on our operations.
Surveys and audits
Our programs are subject to periodic surveys by government authorities and/or their contractors to ensure compliance
with various requirements. Regulators conducting periodic surveys often provide reports containing statements of
deficiencies for alleged failures to comply with various regulatory requirements. In most cases, if a deficiency finding is
made by a reviewing agency, we will work with the reviewing agency to agree upon the steps to be taken to bring our program
into compliance with applicable regulatory requirements. In some cases, however, an agency may take a number of adverse
actions against a program, including:
• the imposition of fines or penalties;
• temporary suspension of admission of new clients to our program’s service;
• in extreme circumstances, exclusion from participation in Medicaid or other programs;
• revocation of our license; or
• contract termination.
While we believe that our programs are in compliance with Medicaid and other program certification requirements and
state licensure requirements, failure to comply with these requirements could have a material adverse impact on our business
and our ability to enter into contracts with other agencies to provide services.
Billing/claims reviews and audits
Agencies and other payers periodically conduct pre-payment or post-payment medical reviews or other audits of our
claims. In order to conduct these reviews, payers request documentation from us and then review that documentation to
determine compliance with applicable rules and regulations, including the eligibility of clients to receive benefits, the
appropriateness of the care provided to those clients, and the documentation of that care.
For-profit ownership
Certain of the agencies for which we provide services restrict our ability to contract directly as a for-profit organization.
Instead, these agencies contract directly with a not-for-profit organization and in certain cases we negotiate to provide
administrative and management services to the not-for-profit providers. The extent to which other agencies impose such
requirements may affect our ability to continue to provide the full range of services that we provide or limit the organizations
with which we can contract directly to provide services.
Corporate practice of medicine and fee splitting
Some states in which we operate prohibit general business entities, such as we are, from “practicing medicine,” which
definition varies from state to state and can include employing physicians, professional therapists and other mental health
professionals, as well as engaging in fee-splitting arrangements with these health care providers. Among other things, we
currently contract with professional therapists to provide intensive home based counseling and with NPs to perform CHAs.
We believe that we have structured our operations appropriately, however, we could be alleged or found to be in violation of
some or all of these laws. If a state determines that some portion of our business violates these laws, it may seek to have us
discontinue those portions or subject us to penalties, fines, certain license requirements or other measures. Any determination
that we have acted improperly in this regard may result in liability to us. In addition, agreements between the corporation and
the professional may be considered void and unenforceable.
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Professional licensure and other requirements
Many of our employees are subject to federal and state laws and regulations governing the ethics and practice of their
professions. In addition, professionals who are eligible to participate in Medicare and Medicaid as individual providers must
not have been excluded from participation in government programs at any time. Our ability to provide services depends upon
the ability of our personnel to meet individual licensure and other requirements.
International Regulation of WD Services segment
As a provider of WD services in multiple international jurisdictions, we are subject to numerous national and local laws
and regulations. These laws and regulations significantly affect the way in which we operate various aspects of our business.
We must also comply with contract-specific technical and infrastructure requirements. Failure to follow the rules and
requirements of these programs can significantly affect our ability to be paid for the services we provide. In addition, our
revenue is primarily derived from contracts that are funded by national governments that are seeking to reduce the overall
unemployment rate, or improve job placement success for targeted cohorts. Further, the revenue we receive from these
contracts is typically tied to milestones that are largely uncontrolled by us. Such milestones include the job placement success
of clients, duration and tenure of clients in jobs once they are placed, and various other market and industry factors including
the overall unemployment rate. A significant decline in national and local government initiatives to provide funding for
employment programs, or shift of expenditures or funding, could cause government sponsors to reduce their expenditures
under those contracts or not renew such contracts, either of which could have a negative impact on our future operating
results.
Additional information
Our website is www.provcorp.com. We make available, free of charge at this website, our annual report on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as soon as reasonably practicable after we
electronically file such material with, or furnish it to, the United States Securities and Exchange Commission. The information
on the website listed above is not and should not be considered part of this annual report on Form 10-K and is not incorporated
by reference in this document. In addition, we will provide, at no cost, paper or electronic copies of our Forms 10-K, 10-Q
and 8-K and amendments to those reports filed with or furnished to the Securities and Exchange Commission. Requests for
such filings should be directed to James Lindstrom, Chief Financial Officer, telephone number: (520) 747-6600.
Item 1A.
Risk Factors.
The following risks should be read in conjunction with other information contained, or incorporated by reference, in
this report, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section
and our consolidated financial statements and related notes. If any of the following risks actually occurs, our business,
financial condition and operating results could be adversely affected.
General Risks
Our annual operating results and stock price may be volatile or may decline regardless of our operating performance.
Our annual operating results and the market price for our common stock may fluctuate significantly in response to a
number of factors, most of which we cannot control, including:
•
•
•
•
•
changes in rates by payers;
changes in Medicare or Medicaid rules or regulations, or applicable foreign regulations;
the development of increased competition;
price and volume fluctuations in the overall stock market;
changes in the competitive landscape of the market for our services, including new entrants to the market;
• market conditions or trends in our industry or the economy as a whole;
•
increased competition in any of our segments, including through insourcing of services by our clients;
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•
other events or factors, including those resulting from war, incidents of terrorism, natural disasters or responses
to these events; and
•
changes in accounting principles.
In addition, the stock markets, and in particular the NASDAQ Global Market, have experienced considerable price and
volume fluctuations that have affected and continue to affect the market prices of equity securities of many companies. In
the past, stockholders have instituted securities class action litigation following periods of market volatility. If we were
involved in securities litigation, we could incur substantial costs, and our resources and the attention of management could
be diverted from our business.
We obtain a significant portion of our business through responses to government requests for proposals and we may not
be awarded contracts through this process in the future, or contracts we are awarded may not be profitable.
We obtain, and will continue to seek to obtain, a significant portion of our business from state or local government
entities. To obtain business from government entities, we are often required to respond to RFPs. To propose effectively, we
must accurately estimate our cost structure for servicing a proposed contract, the time required to establish operations and
the terms of the proposals submitted by competitors. We must also assemble and submit a large volume of information within
rigid and often short timetables. Our ability to respond successfully to RFPs will greatly impact our business. We may not be
awarded contracts through the RFP process, and our proposals may not result in profitable contracts.
If we fail to establish and maintain important relationships with officials of government entities and agencies, we may not
be able to successfully procure or retain government-sponsored contracts, which could negatively impact our revenues.
To facilitate our ability to procure or retain government-sponsored contracts, we rely in part on establishing and
maintaining relationships with officials of various government entities and agencies. These relationships enable us to provide
informal input and advice to the government entities and agencies prior to the development of an RFP or program for
privatization of human services and enhance our chances of procuring contracts with these payers. The effectiveness of our
relationships may be reduced or eliminated with changes in the personnel holding various government offices or staff
positions. We also may lose key personnel who have these relationships. We may be unable to successfully manage our
relationships with government entities and agencies and with elected officials and appointees. Any failure to establish,
maintain or manage relationships with government and agency personnel may hinder our ability to procure or retain
government-sponsored contracts.
Government unions may oppose privatizing government programs to outside vendors such as us, which could limit our
market opportunities.
Our success depends in part on our ability to win contracts to administer and manage programs traditionally
administered by government employees. Many government employees, however, belong to labor unions with considerable
financial resources and lobbying networks. These unions could apply opposing political pressure on legislators and other
officials seeking to privatize government programs. Union opposition could result in our losing government contracts or
being precluded from providing services under government contracts, or maintaining or renewing existing contracts. The
ability to renew and obtain new contracts is critical to our financial success. If we could not renew certain contracts, or obtain
new contracts, due to opposition political actions, it could have a material adverse impact on our operating results.
Inaccurate, misleading or negative media coverage could damage our reputation and harm our ability to procure
government sponsored contracts.
The media sometimes provides news coverage about our contracts and the services we or our competitors provide to
clients in our sectors. This media coverage, if negative, could influence government officials to slow the pace of privatizing
or retendering government services. Moreover, inaccurate, misleading or negative media coverage about us could harm our
reputation and, accordingly, our ability to obtain government sponsored contracts.
Our business is subject to risks of litigation.
The services we provide across our four segments are subject to lawsuits and claims. A substantial award could have a
material adverse impact on our operations and cash flows, and could adversely impact our ability to continue to purchase
appropriate liability insurance. We can be subject to claims for negligence or intentional misconduct (in addition to
professional liability type claims) by an employee or a third party we engage to assist with the provision of services, including
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but not limited to claims arising out of accidents involving vehicle collisions, workforce development placements or CHAs
and various claims that could result from employees or contracted third parties driving to or from interactions with clients
and while providing direct client services. We are also subject to claims alleging we did not properly treat an individual or
failed to properly diagnose, supervise and/or care for a client. We can be subject to employee related claims such as wrongful
discharge or discrimination or a violation of equal employment laws and permitting issues. While we are insured for these
types of claims, damages exceeding our insurance limits or outside our insurance coverage, such as a claim for fraud, certain
wage and hour violations or punitive damages, could adversely affect our cash flow and financial condition.
We face substantial competition in attracting and retaining experienced professionals, and we may be unable to sustain
or grow our business if we cannot attract and retain qualified employees.
Our success depends to a significant degree on our ability to attract and retain highly qualified and experienced
professionals who possess the skills and experience necessary to deliver high quality services to our clients. Our objective of
providing the highest quality of service to our clients is a significant consideration when we evaluate education, experience
and qualifications of potential candidates for employment as direct care and administrative staff. To that end, we attempt to
hire professionals and others with requisite educational backgrounds and professional certifications. These employees are in
great demand and are likely to remain a limited resource for the foreseeable future. We must quickly hire project leaders and
case management personnel after a contract is awarded to us. Contract provisions and client needs determine the number,
education and experience levels of social services professionals we hire. We continually evaluate client census, case loads
and client eligibility to determine our staffing needs under each contract.
The performance in each of our business segments also depends on the talents and efforts of our highly skilled
intellectual technology professionals. Competition for skilled intellectual technology professionals can be intense. Our
success depends on our ability to recruit, retain and motivate these individuals.
Our ability to attract and retain employees with the requisite experience and skills depends on several factors including,
but not limited to, our ability to offer competitive wages, benefits and professional growth opportunities. Some of the
companies with which we compete for experienced personnel have greater financial, technical, political and marketing
resources, name recognition and a larger number of clients and payers than we do. The inability to attract and retain
experienced personnel could have a material adverse effect on our business.
Our success depends on our ability to manage growing and changing operations.
Since 1996, our business has grown significantly in size and complexity, most recently with the acquisitions of Ingeus
and Matrix in 2014. This growth has placed, and is expected to continue to place, significant demands on our management,
systems, internal controls and financial and physical resources. In addition, we expect that we will need to further develop
our financial and managerial controls and reporting systems to accommodate future growth. This could require us to incur
significant expense for, among other things, hiring additional qualified personnel, retaining professionals to assist in
developing the appropriate control systems and expanding our information technology infrastructure. The nature of our
business is such that qualified management personnel can be difficult to find. Our inability to manage growth effectively
could have a material adverse effect on our financial results.
Our success depends on our ability to compete effectively in the marketplace.
We compete for clients and for contracts with a variety of organizations that offer similar services across all of our
segments. Many organizations of varying sizes compete with us, including local human services organizations, local not-for-
profit organizations and community based organizations, larger companies and institutional providers that offer community
based care services, organizations that provide similar NET management services to Medicaid eligible beneficiaries in local
markets, large multi-national corporations that provide WD services and CHA providers. Some of these companies have
greater financial, technical, political, marketing, name recognition and other resources and a larger number of clients or
payers than we do. In addition, some of these companies offer more services than we do. We have experienced, and expect
to continue to experience, competition from new entrants into the markets in which we operate. Increased competition may
result in pricing pressures, loss of or failure to gain market share or loss of clients or payers, any of which could have a
material adverse effect on our operating results.
Our business could be subject to security breaches and attacks.
We provide services to individuals, including services that require us to maintain sensitive and personal client
information, including information relating to their health, social security numbers and other identifying data. Therefore, our
information technology systems store client information protected by numerous federal, state and foreign regulations. Further,
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our systems include interfaces to third-party stakeholders, often connected via the Internet. As a result of the data we maintain
and third-party access, we are subject to increasing cyber security risks. The nature of our business, where services are often
performed outside a secured location, adds additional risk. While we have implemented measures to detect and prevent
security breaches and cyber-attacks, our measures may not be effective. Criminals are constantly devising schemes to
circumvent information technology security safeguards, and other companies have recently suffered serious data security
breaches. If unauthorized parties gain access to our networks or databases, they may be able to steal, publish, delete or modify
our private and sensitive third-party information, including personal identification information. In addition, employees may
intentionally or inadvertently cause data or security breaches that result in the unauthorized release of personal or confidential
information.
Our WD Services segment has operations in many countries in Europe and these operations have access to significant
amounts of sensitive personal information about individuals. In Europe, these operations are subject to European and national
data privacy legislation, which imposes significant obligations on data processors and controllers with respect to such
personal information. In addition, our contractual obligations with customers can require additional, stringent commitments
in the handling of such information, which are subject to client audit procedures and other checks, often with severe
contractual penalties in the case of breach.
As a result of any security breach, or loss or mishandling of data, we could incur liability, regulatory actions, fines,
contractual deductions or litigation, which could increase our costs and have a material adverse effect on our operating results.
Further, any such breach, or loss or mishandling of data could impact our business reputation and could result in the loss of
contractual relationships or make it more difficult to obtain new contracts, having an adverse effect on our business and
financial performance.
Regulatory Risks
We conduct business in a heavily regulated healthcare industry. Compliance with existing regulations is costly, and
changes in regulations or violations of regulations may result in increased costs or sanctions that could reduce our
revenue and profitability.
The healthcare industry is subject to extensive federal and state regulation relating to, among other things:
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professional licensure;
conduct of operations;
addition of facilities, equipment and services, including certificates of need;
coding and billing for services; and
payment for services.
Both federal and state government agencies have increased coordinated civil and criminal enforcement efforts related
to the healthcare industry. Regulations related to the healthcare industry are extremely complex and, in many instances, the
industry does not have the benefit of significant regulatory or judicial interpretation of those laws. The Patient Protection and
Affordable Care Act has also introduced some degree of regulatory uncertainty as the industry does not know how the changes
it introduces will affect many aspects of the industry. Medicare and Medicaid anti-fraud and abuse laws prohibit certain
business practices and relationships related to items and services reimbursable under Medicare, Medicaid and other
governmental healthcare programs, including the payment or receipt of remuneration to induce or arrange for referral of
patients or recommendation for the provision of items or services covered by Medicare or Medicaid or any other federal or
state healthcare program. Federal and state laws prohibit the submission of false or fraudulent claims, including claims to
obtain reimbursement under Medicare and Medicaid. We have implemented compliance policies to help assure our
compliance with these regulations as they become effective; however, different interpretations or enforcement of these laws
and regulations in the future could subject our practices to allegations of impropriety or illegality or could require us to make
changes in our facilities, equipment, personnel, services or the manner in which we conduct our business.
Our HA Services segment operates in a heavily regulated healthcare industry, and changes to the regulatory landscape
could have a material adverse effect on our results of operations and financial condition.
The CHA services industry is primarily regulated by federal and state healthcare laws and the requirements of
participation and reimbursement of the MA Program established by CMS. From time to time, CMS considers changes to
regulatory guidelines with respect to prospective CHAs. CMS could adopt new guidelines that may, for example, increase
the costs associated with CHAs or limit the opportunities available to administer CHAs. Implementation of additional
regulations on the CHA industry by CMS or other regulatory bodies could have a material adverse impact on our HA Services
segment’s revenues and margins, which could have a material adverse impact on our consolidated results of operations.
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In our WD Services segment, we conduct business in several countries, each with its own system of regulation. Compliance
with existing regulations is costly, and changes in regulations or violations of regulations may result in increased costs or
sanctions that could reduce our revenue and profitability.
In 2014, Ingeus operated in 10 countries outside the US. Each of these countries has its own national and municipal
laws and regulations, and some countries such as Australia, Germany and Switzerland, have both federal and state regulations.
These laws can differ significantly from country to country. In addition, in Europe, countries (including the United Kingdom)
are subject to European Union laws and rules. We have implemented compliance policies to help assure our compliance with
these laws and regulations as they become effective; however, different interpretations or enforcement of these laws and
regulations in the future could subject our practices to allegations of impropriety or illegality or could require us to make
changes in our facilities, equipment, personnel, services or the manner in which we conduct our business.
We could be subject to actions for false claims if we do not comply with government coding and billing rules, which could
have a material adverse impact on our operating results.
If we fail to comply with federal and state documentation, coding and billing rules, we could be subject to criminal
and/or civil penalties, loss of licenses and exclusion from the Medicare and Medicaid programs, which could have a material
adverse impact on our operating results. In billing for our services to third-party payers, we must follow complex
documentation, coding and billing rules. These rules are based on federal and state laws, rules and regulations, various
government pronouncements, and on industry practice. Failure to follow these rules could result in potential criminal or civil
liability under the federal False Claims Act, under which extensive financial penalties can be imposed and/or under various
state statutes which prohibit the submission of false claims for services covered. Compliance failure could further result in
criminal liability under various federal and state criminal or civil statutes.
In the WD Services segment, particularly in Europe, our contracts are subject to stringent claims and invoice processing
regimes which vary depending on the customer and nature of the payment mechanism. Under European procurement
legislation which has been implemented in each European Union member state, any conviction for fraud can result in a
permanent, mandatory ban from participating in public procurement tenders. This could significantly affect our business
given that most of our customers in Europe are governmental organizations. Any such breaches or deficiencies in paperwork
associated with billing may also be subject to contractual claw back regimes and penalties, which can be enforced many years
after the revenue has been paid by the relevant authority.
While we plan to carefully and regularly review our documentation, coding and billing practices, the rules are frequently
vague and confusing and we cannot assure that governmental investigators, private insurers or private whistleblowers will
not challenge our practices. Such a challenge could result in a material adverse effect on our financial position and results of
operations.
If we fail to comply with the federal Anti-kickback Statute, we could be subject to criminal and civil penalties, loss of
licenses and exclusion from the Medicare and Medicaid programs, all of which could have a material adverse impact on
our operating results.
The federal Anti-kickback Statute prohibits the offer, payment, solicitation or receipt of any form of remuneration in
return for referring, ordering, leasing, purchasing or arranging for or recommending the ordering, purchasing or leasing of
items or services payable by a federally funded healthcare program. Any of our financial relationships with healthcare
providers will be potentially implicated by this statute to the extent Medicare or Medicaid referrals are implicated. Violations
of the Anti-kickback Statute could result in substantial civil or criminal penalties, including criminal fines of up to $25,000
per violation, imprisonment of up to five years, civil penalties under the Civil Monetary Penalties Law (42 U.S.C. 1320a-7a)
of up to $50,000 per violation, plus three times the remuneration involved, civil penalties under the False Claims Act of up
to $11,000 for each claim submitted, plus three times the amounts paid for such claims and exclusion from participation in
the Medicare and Medicaid programs. Any such penalties could have a significant negative effect on our operations.
Furthermore, the exclusion, if applied to us, could result in significant reductions in our revenues, which could materially
and adversely affect our business, financial condition and results of our operations. In addition, many states have adopted
laws similar to the federal Anti-kickback Statute with similar penalties.
If we fail to comply with physician self-referral laws, to the extent applicable to our operations, we could experience a
significant loss of reimbursement revenue.
We may be subject to federal and state statutes and regulations banning payments for referrals of patients and referrals
by physicians to healthcare providers with whom the physicians have a financial relationship and billing for services provided
pursuant to such referrals if any occur. Violation of these federal and state laws and regulations, to the extent applicable to
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our operations, may result in prohibition of payment for services rendered, loss of licenses, fines, criminal penalties and
exclusion from Medicare and Medicaid programs. To the extent we do maintain such financial relationships with physicians,
we rely on certain exceptions to self-referral laws that we believe will be applicable to such arrangements. Any failure to
comply with such exceptions could result in the penalties discussed above.
Our WD Services segment operates internationally, which exposes the group to risks of bribery, corruption and collusive
tendering practices with respect to public officials and tenders.
As an international business whose customers are largely in the public sector, the WD Services segment generally wins
work through public tender processes. Various statutes, such as the UK’s Bribery Act and the Foreign Corrupt Practices Act
in the US, prohibit us from providing anything of value to foreign officials for the purposes of influencing official decisions
or obtaining or retaining business or otherwise obtaining favorable treatment. These statutes require us to maintain adequate
record-keeping and internal accounting practices to accurately reflect our transactions. In addition, many countries in which
we operate have antitrust or competition regulations which prohibit collusive tendering or bid-rigging behavior. Policies and
procedures we implement to prevent bribery, corruption and anti-competitive conduct may not effectively prevent us from
violating these regulations in every transaction in which we may engage, and such a violation could adversely affect our
reputation, business, financial condition and results of operations. Any breach of such laws could also expose our operations
in Europe to mandatory, permanent bans from public procurement processes.
We are subject to regulations relating to privacy and security of patient information. Failure to comply with privacy
regulations could result in a material adverse impact on our operating results.
There are numerous federal and state regulations addressing patient information privacy and security concerns. In
particular, the federal regulations issued under the Health Insurance Portability and Accountability Act of 1996 (“HIPAA”)
contain provisions that:
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protect individual privacy by limiting the uses and disclosures of patient information;
require the implementation of security safeguards to ensure the confidentiality, integrity and availability of
individually identifiable health information in electronic form; and
prescribe specific transaction formats and data code sets for certain electronic healthcare transactions.
Compliance with state and federal laws and regulations is costly and requires our management to expend substantial
time and resources. Further, the HIPAA regulations and state privacy laws expose us to increased regulatory risk, as the
penalties associated with a failure to comply, even if unintentional, could have a material adverse effect on our results of
operations.
We have an internal committee to maintain our privacy and security policies regarding client information in compliance
with HIPAA. This committee is responsible for training our employees, including our regional and local managers and staff,
to comply with HIPAA and monitoring compliance with the policy. The costs associated with our ongoing compliance could
be substantial, which could negatively impact our results of operations.
Our WD Services segment has operations in many countries in Europe and these operations have access to significant
amounts of sensitive personal information about individuals. In Europe, these operations are subject to European and national
data privacy legislation which imposes significant obligations on data processors and controllers with respect to such personal
information. Some countries, such as France and Germany, have particularly strong privacy laws which impose even greater
obligations on people handling personal information. There are proposed amendments being suggested to European data
privacy legislation which could significantly increase the fines for any breaches. In addition to fining powers, information
privacy regulators in Europe have significant powers to require organizations that breach regulations to put in place measures
to ensure that such breaches do not occur again, and require businesses to stop processing personal information until the
required measures are in place. Such orders could significantly impact our business given we are required to handle personal
information as part of our service delivery model.
As a government contractor, we are subject to an increased risk of litigation and other legal actions and liabilities.
As a government contractor, we are subject to an increased risk of investigation, criminal prosecution, civil fraud,
whistleblower lawsuits and other legal actions and liabilities that are not as frequently experienced by companies that do not
provide government sponsored services. Companies providing government sponsored services can also become involved in
public inquiries which can lead to negative media speculation or potential cancellation or termination of contracts. In our
WD Services segment in Europe, European procurement regulations in force in each European Union member state require
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public procurement authorities to impose a permanent, mandatory ban for participation in public procurement where
companies are found guilty of fraud or certain other criminal offenses. Authorities can also exercise their discretion to
blacklist companies where they believe they have been involved in acts of gross misconduct. The occurrence of any of these
actions, regardless of the outcome, could disrupt our operations and result in increased costs, and could limit our ability to
obtain additional contracts in other jurisdictions.
The US federal government may refuse to grant consents or waivers necessary to permit for-profit entities to perform
certain elements of government programs.
Under current law, in order to privatize certain functions of government programs, the federal government must grant
a consent or waiver to the petitioning state or local agency. If the federal government does not grant a necessary consent or
waiver or withdraws approval of any granted waiver, the state or local agency will be unable to contract with a for-profit
entity, such as us, to provide service. Failure by state or local agencies to obtain consents or waivers could adversely affect
our continued business operations and future growth.
Our business could be adversely affected by future legislative changes that hinder or reverse the privatization of human
services, NET services or WD services.
The market for certain of our services depends largely on government sponsored programs. These programs can be
modified or amended at any time. Moreover, part of our growth strategy includes aggressively pursuing opportunities created
by government initiatives to privatize the delivery of human services, NET services and WD services. However, there are
opponents to the privatization of these services and, as a result, future privatization is uncertain. If additional privatization
initiatives are not proposed or enacted, or if previously enacted privatization initiatives are challenged, repealed or
invalidated, there could be a material adverse impact on our operating results.
Our business is subject to licensing regulations and other regulatory provisions, including regulatory provisions governing
surveys and audits. Changes to, or violations of, these regulations could negatively impact our revenues.
In many of the locations where we operate, we are required by local laws (both US and foreign) to obtain and maintain
licenses. The applicable state and local licensing requirements govern the services we provide, the credentials of staff, record
keeping, treatment planning, client monitoring and supervision of staff. The failure to maintain these licenses or the loss of a
license could have a material adverse impact on our business and could prevent us from providing services to clients in a
given jurisdiction. Most of our contracts are subject to surveys or audit by our payers. We are also subject to regulations that
restrict our ability to contract directly with a government agency in certain situations. Such restrictions could affect our ability
to contract with certain payers, and could have a material adverse impact on our results of operations.
Financial Risks
Changes in budgetary priorities of the government entities that fund the services we provide could result in our loss of
contracts or a decrease in amounts payable to us under our contracts.
Our revenue is largely derived from contracts that are directly or indirectly paid or funded by government agencies. All
of these contracts are subject to legislative appropriations and state or national budget approval. The availability of funding
under our contracts with state governments is dependent in part upon federal funding to states. Changes in Medicaid
methodology may further reduce the availability of federal funds to states in which we provide services. Among the
alternative Medicaid funding approaches that states have explored are provider assessments as tools for leveraging increased
Medicaid federal matching funds. Provider assessment plans generate additional federal matching funds to the states for
Medicaid reimbursement purposes, and implementation of a provider assessment plan requires approval by the Centers for
Medicare and Medicaid Services in order to qualify for federal matching funds. These plans usually take the form of a bed
tax or a quality assessment fee, which were historically required to be imposed uniformly across classes of providers within
the state, except that such taxes only applied to Medicaid health plans.
However, the Deficit Reduction Act of 2005, or Deficit Reduction Act, requires states that desire to impose provider
taxes to impose taxes on all MCOs, not just Medicaid MCOs. This uniformity requirement as it relates to taxing all MCOs
may make states more reluctant to use provider assessments as a vehicle for raising matching funds and, thus, reduce the
amount of funding that the states receive and have available. Moreover, under the Deficit Reduction Act, states may be
allowed to reduce the benefits provided to certain Medicaid enrollees, which could affect the services that states contract for
with us. We cannot make any assurances that these Medicaid changes will not negatively affect the funding under our
contracts. As funding under our contracts is dependent in part upon federal funding, such funding changes could have a
significant effect upon our business.
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Currently, many of the US states and overseas countries in which we operate are facing budgetary shortfalls or changes
in budgetary priorities. In addition, in some states eligibility requirements for human services clients have been tightened to
stabilize the number of eligible clients and in certain instances states have implemented or are considering implementing a
single point of access to care or a managed care model, which reduces the size of our potential market in those states. While
many of these states are dealing with budgetary concerns by shifting costs from institutional care to home and community
based care such as we provide, there is no assurance that this trend will continue.
Likewise, in many of the overseas countries addressed by our WD Services segment, a continued focus on austerity
measures following the global financial crisis to reduce national and local budget deficits could lead to further spending cuts
or changes to welfare arrangements. This may make availability of funding for outsourcing of such services more difficult to
obtain from relevant government departments, which may lead to more challenging terms and conditions including pressure
on prices or volumes of services provided.
Consequently, a significant decline in government expenditures, shift of expenditures or funding away from programs
that call for the types of services that we provide, or change in government contracting or funding policies could cause payers
to terminate their contracts with us or reduce their expenditures under those contracts, either of which could have a negative
impact on our operating results.
We derive a significant amount of our revenues from a few payers, which puts us at risk. Any changes in the funding,
financial viability or our relationships with these payers could have a material adverse impact on our results of operations.
We generate a significant amount of our revenues in our segments from a few payers under a small number of contracts.
For example, for the years ended December 31, 2014, 2013 and 2012, we generated approximately 48.2%, 48.0% and 48.5%,
respectively, of our total revenue from our top ten payers. Additionally, our top five payers related to our NET Services
operating segment represent, in the aggregate, approximately 43.2%, 43.6% and 43.2%, respectively, of our NET Services
operating segment revenue for the years ended December 31, 2014, 2013 and 2012. The top five payers related to our Human
Services operating segment represent, in the aggregate, approximately 37.0%, 38.0% and 38.5%, respectively, of our Human
Services operating segment revenue for the years ended December 31, 2014, 2013 and 2012. The top payer related to our
WD Services operating segment represented 68.0% of our WD Services operating segment revenue for the period from May
31, 2014 to December 31, 2014. Additionally, the top payer related to our HA Services operating segment represented 43.2%
of our HA Services operating segment revenue for the period from October 23, 2014 to December 31, 2014. The loss of,
reduction in amounts generated by, or changes in methods or regulations governing payments for our services under these
contracts could have a material adverse impact on our revenue and results of operations.
Changes to the fee structure in our workforce development contracts with the UK Department of Work & Pension could
have a material effect on our operating results.
Approximately 68.0% of Ingeus’s revenues for the period from May 31, 2014 to December 31, 2014 are derived from
seven standardized regional contracts with the Department of Work & Pension (“DWP”) under the Work Programme,
whereby services are provided to long-term unemployed individuals to place them into jobs. Under the terms of the contracts
with DWP, effective July 1, 2014, the fee structure has changed, eliminating certain upfront payments and discounting certain
other fees. As a result, going forward, Ingeus will receive the majority of its revenue under these contracts only upon
demonstrating the client’s continued employment for a substantial period of time and upon achievement of incentive measures
over the defined measurement periods. However, a substantial portion of the total cost of providing services to clients is
incurred in the period between referral and job placement. The loss of, continued reduction in amounts generated by, or
changes in methods or regulations governing payments for our services under these contracts with DWP could have a material
adverse impact on our WD Services segment’s revenue and margins, which could have a material adverse impact on our
consolidated results of operations.
Our contracts in certain of our segments are in many instances short-term in nature, and can also be terminated prior to
expiration, without cause and without penalty to the payers. There can be no assurance that they will survive until the end
of their stated terms, or that upon their expiration these contracts will be renewed or extended. Disruptions to our contracts
could have a material adverse impact on our results of operations.
Most of our Human Services contracts contain base periods of only one year. While some of them also contain options
for renewal, usually successive six month or one year terms, payers are not required to extend their contracts into these option
periods. In addition, a significant number of our Human Services contracts not only allow the payer to terminate the contract
immediately for cause (such as for our failure to meet our contract obligations) but also permit the payer to terminate the
contract at any time prior to its stated expiration date. In most cases the payer may terminate the Human Services or NET
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Services contracts without cause, at will and without penalty to the payer, either immediately or upon the expiration of a short
notice period in the event government appropriations supporting the programs serviced by the contract are reduced or
eliminated. The failure of payers to renew or extend significant contracts or their early termination of significant contracts
could adversely affect our financial performance. We cannot anticipate if, when or to what extent a payer might terminate its
contract with us prior to its expiration or fail to renew or extend its contract with us.
Our contracts are subject to audit and modification by the payers with whom we contract, at their sole discretion.
Our business depends on our ability to successfully perform under various government funded contracts. Under the
terms of these contracts, payers can review our performance, as well as our records and general business practices at any
time, and may, in their discretion:
• suspend or prevent us from receiving new contracts or extending existing contracts because of violations or suspected
violations of procurement laws or regulations;
• terminate or modify our existing contracts;
• reduce the amount we are paid under our existing contracts; and/or
• audit and object to our contract related fees.
If payers have significant audit findings, or if they make material modifications to our contracts, it could have a material
adverse impact on our results of operations.
A loss of our status as a licensed provider in any jurisdiction where we operate could result in the termination of a number
of our contracts, which could negatively impact our revenues.
Our status as a licensed provider of health services is subject to periodic renewal, review and examination by various
federal, state, local and other governmental agencies. If we lost our status as a licensed provider in any jurisdiction, the
contracts under which we provide services in that jurisdiction could be subject to termination. Moreover, such an event could
constitute a violation of provisions of our contracts in other jurisdictions, resulting in further contract terminations.
If we fail to satisfy our contractual obligations, we could be liable for damages and financial penalties, and it could harm
our ability to keep our existing contracts or obtain new contracts.
Our failure to comply with our contract obligations could, in addition to providing grounds for immediate termination
of the contract for cause, negatively impact our financial performance and damage our reputation, which, in turn, could have
a material adverse effect on our ability to maintain current contracts or obtain new ones. Our failure to meet contractual
obligations could also result in substantial actual and consequential financial damages. The termination of a contract for cause
could, for instance, subject us to liabilities for excess costs incurred by a payer in obtaining similar services from another
source. In addition, our contracts require us to indemnify payers for our failure to meet standards of care, and some of them
contain liquidated damages provisions and financial penalties that we must pay if we breach these contracts.
If we fail to estimate accurately the cost of performing certain contracts, we may experience reduced or negative margins.
Under our FFS contracts, we receive fees based on our interactions with government sponsored clients. To earn a profit
on these contracts, we must accurately estimate costs incurred in providing services. Our risk on these contracts is that our
client population is not large enough to cover our fixed costs, such as rent and overhead. Our FFS contracts are not reimbursed
on a cost basis and therefore, if we fail to estimate our costs accurately, we may experience reduced margins, or even losses
on these contracts.
Additionally, approximately 84.1%, 83.4% and 83.3% of our NET services revenue during 2014, 2013 and 2012,
respectively, was generated under capitated contracts with the remainder generated through FFS and flat fee contracts. Under
most of our capitated contracts, we assume the responsibility of managing the needs of a specific geographic population by
contracting out transportation services to local van, cab and ambulance companies on a per ride or per mile basis. We use a
“pricing model” to determine applicable contract rates, which takes into account factors, such as estimated utilization, state
specific data, previous experience in the state and/or with similar services, estimated volume and availability of mass transit.
The amount of the fixed per member, per month fee is determined in the bidding process, but predicated on actual historical
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transportation data for the subject geographic region (provided by the payer), actuarial work performed in-house as well as
by third party actuarial firms and actuarial analyses provided by the payer. If the utilization of our services is more than we
estimated, the contract may be less profitable than anticipated, or may not be profitable at all.
We record revenue from cost-based service contracts based on a combination of direct costs, indirect overhead allocations,
and stated contractual margins on those costs. We may be required to subsequently refund a portion of the excess funds,
if any.
Our cost-based service contracts require us to account for contingencies such as excess cost per service over the
allowable contract rate and/or an insufficient number of encounters. In cases where funds paid to us exceed the allowable
costs to provide services under the contracts, we may be required to pay back the excess funds. While we believe we have
adequately reserved for potential refund amounts, the final settlement of certain contract reimbursements can sometimes
occur at a significantly later date than the period services were provided. It is possible that we are unaware of certain potential
refunds until they occur which could have a material adverse impact on our operating results. Approximately 19.0%, 20.3%
and 18.6% of our Human Services segment revenues or approximately 4.8%, 6.4% and 6.0% of our consolidated revenues
for the years ended December 31, 2014, 2013 and 2012, respectively, were derived from cost-based service contracts.
Our results of operations will continue to fluctuate due to seasonality.
Our quarterly operating results and operating cash flows normally fluctuate as a result of seasonal variations in our
business. In our Human Services operating segment, lower client demand for our home and community based services during
the holiday and summer seasons generally results in lower revenue during those periods; however, our expenses related to
the Human Services operating segment do not vary significantly with these changes. As a result, our Human Services
operating segment typically experiences lower operating margins during the holiday and summer seasons. Our NET Services
operating segment experiences fluctuations in demand for our NET services during the summer, winter and holiday seasons.
Due to higher demand in the summer months and lower demand in the winter and holiday seasons, coupled with a fixed
revenue stream based on a per member per month based structure, our NET Services operating segment typically experiences
lower operating margins in the summer season and higher operating margins in the winter and holiday seasons. Our HA
Services operating segment generally experiences higher CHA volume in the second half of the calendar year as demand
accelerates for annual CHAs toward year-end. We expect quarterly fluctuations in operating results and operating cash flows
to continue as a result of the seasonal demand for all of these services. As we enter new markets and expand our business,
we could be subject to additional seasonal variations.
Our reported financial results could suffer if there is an impairment of goodwill or other intangible assets.
Goodwill may be impaired if the estimated fair value of one or more of our reporting units is less than the carrying
value of the respective reporting unit. Because we have grown in part through acquisitions, goodwill and other intangible
assets represent a significant portion of our assets. We perform an analysis on our goodwill balances to test for impairment
on an annual basis. Similarly, interim impairment tests may also be required in advance of our annual impairment test if
events occur or circumstances change that would more likely than not reduce the fair value, including goodwill, of one or
more of our reporting units below the reporting unit’s carrying value. Such circumstances could include but are not limited
to: (1) loss of significant contracts, (2) a significant adverse change in legal factors or in the climate of our business,
(3) unanticipated competition, (4) an adverse action or assessment by a regulator, or (5) a significant decline in our stock
price. If events occur or circumstances change, we may be required to record an impairment adjustment to our goodwill or
other intangible assets which could have a material adverse impact on our results of operations and financial position.
We may incur costs before receiving related revenues, which could result in cash shortfalls.
When we are awarded a contract to provide services, we may incur expenses before we receive any contract payments.
These expenses include leasing office space, purchasing office equipment and hiring personnel. As a result, in certain large
contracts where the government does not fund program start-up costs, we may be required to invest significant sums of money
before receiving related contract payments. In addition, payments due to us from payers may be delayed due to billing cycles
or as a result of failures to approve government budgets in a timely manner. Moreover, especially under FFS arrangements,
any resulting cash shortfall could be exacerbated if we fail to either invoice the payer or to collect our fee in a timely manner.
This could have a material adverse impact on our ongoing operations and our financial position.
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We have a substantial amount of debt, which could impair our financial condition.
We have a significant amount of indebtedness. As of December 31, 2014, we had approximately $575.2 million of total
indebtedness and approximately $30.3 million of available letter of credit and borrowing capacity under our credit facilities.
Our substantial level of indebtedness increases the risk that we may be unable to generate cash sufficient to pay amounts due
in respect of our indebtedness. Our substantial indebtedness could have other important consequences on our business. For
example, it could:
• make it more difficult for us to satisfy our obligations;
• limit our ability to borrow additional amounts to fund working capital, capital expenditures, debt service
requirements, execution of our business strategy or acquisitions and other purposes;
• require us to dedicate a substantial portion of our cash flow from operations to pay principal and interest on our debt,
which would reduce the funds available to us for other purposes;
• make us more vulnerable to adverse changes in general economic, industry and competitive conditions, as well as in
government regulation and to our business;
• expose us to risks inherent in interest rate fluctuations because some of our borrowings are at variable rates of
interest, which could result in higher interest expenses in the event of increases in interest rates; and
• make it more difficult to satisfy our financial obligations.
Our ability to satisfy and manage our debt obligations depends on our ability to generate cash flow and on overall
financial market conditions. To some extent, this is subject to prevailing economic and competitive conditions and to certain
financial, business and other factors, many of which are beyond our control. Our business may not generate sufficient cash
flow from operations to permit us to pay principal, premium, if any, or interest on our debt obligations. If we are unable to
generate sufficient cash flow from operations to service our debt obligations and meet our other cash needs, we may be forced
to reduce or delay capital expenditures, sell or curtail assets or operations, seek additional capital, or seek to restructure or
refinance our indebtedness. If we must sell or curtail our assets or operations, it may negatively affect our ability to generate
revenue.
In addition, on February 11, 2015 and March 12, 2015, we issued $65.5 million and $15.8 million, respectively, of
convertible preferred stock. The terms of the convertible preferred stock require us to pay mandatory quarterly dividends,
either in cash or through an increase in the stated value of such stock. Our ability to satisfy and manage our obligations under
our outstanding preferred stock depends, in part, on our ability to generate cash flow and on overall financial market
conditions and the other factors discussed above.
We may not be able to generate sufficient cash to service all of our indebtedness and may be forced to take other actions
to satisfy our obligations under our indebtedness, which may not be successful.
Our ability to make scheduled payments on or to refinance our debt obligations depends on our financial condition and
operating performance, which are subject to prevailing economic and competitive conditions and to certain financial,
business, legislative, regulatory and other factors beyond our control. We may be unable to maintain a level of cash flows
from operating activities sufficient to permit us to fund our day-to-day operations or to pay the principal, premium, if any,
and interest on our indebtedness.
If our cash flows and capital resources are insufficient to fund our debt service obligations, we could face substantial
liquidity problems and could be forced to reduce or delay investments and capital expenditures or to sell assets or operations,
seek additional capital or restructure or refinance our indebtedness. We may not be able to effect any such alternative
measures, if necessary, on commercially reasonable terms or at all and, even if successful, such alternative actions may not
allow us to meet our scheduled debt service obligations.
Our credit facility restricts our ability to dispose of assets and use the proceeds from any such dispositions and may also
restrict our ability to raise debt or equity capital to be used to repay other indebtedness when it becomes due. We may not be
able to consummate those dispositions or to obtain proceeds in an amount sufficient to meet any debt service obligations then
due.
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Our variable-rate indebtedness exposes us to interest rate risk, which could cause our debt service obligations to increase
significantly.
Borrowings under our credit facility are subject to variable rates of interest and expose us to interest rate risk. If interest
rates increase, our debt service obligations on our variable-rate indebtedness would increase and our net income would
decrease, even though the amount borrowed under the facilities remained the same. As of December 31, 2014, we had $510.6
million outstanding variable-rate borrowings under our credit facility. Borrowings under our credit facilities accrue interest
at LIBOR plus 3.0% per annum as of December 31, 2014. An increase of 1% in the LIBOR rate would cause an increase in
interest expense of up to $17.0 million over the remaining term of the Amended and Restated Credit Agreement, which
matures in 2018.
Restrictive covenants in our credit facility may limit our current and future operations, particularly our ability to respond
to changes in our business or to pursue our business strategies.
The terms contained in the agreements that govern certain of our indebtedness, and the agreements that govern any
future indebtedness of ours may include, a number of restrictive covenants that impose significant operating and financial
restrictions, including restrictions on our ability to take actions that we believe may be in our best interest. These agreements,
among other things, limit our ability to:
• incur additional debt;
• provide guarantees in respect of obligations of other persons;
• issue redeemable stock and preferred stock;
• pay dividends or distributions or redeem or repurchase capital stock;
• make loans, investments and capital expenditures;
• enter into transactions with affiliates;
• create or incur liens;
• make distributions from our subsidiaries;
• sell assets and capital stock of our subsidiaries;
• make acquisitions; and
• consolidate or merge with or into, or sell substantially all of our assets to, another person.
A breach of the covenants or restrictions could result in a default under the applicable indebtedness. Such default may
allow the creditors to accelerate the related debt and may result in the acceleration of any other debt to which a cross
acceleration or cross-default provision applies. In the event our lenders and note holders accelerate the repayment of our
borrowings, we cannot assure that we and our subsidiaries would have sufficient assets to repay such indebtedness.
Our use of a reinsurance program to cover certain claims for losses suffered and costs or expenses incurred could
negatively impact our business.
We are reinsured with regard to a substantial portion of our automobile, general liability, professional liability and
workers’ compensation insurance. We also reinsure the general liability, professional liability, workers’ compensation
insurance, automobile liability and automobile physical damage of various members of the network of subcontracted
transportation providers and independent third parties over various policy years under reinsurance programs through our two
wholly-owned captive insurance subsidiaries. Although, effective February 15, 2011, we did not renew our reinsurance
agreement and will not assume liabilities for policies that cover the general liability, automobile liability, and automobile
physical damage coverage of our independent third party transportation providers after that date, we will continue to
administer existing policies for the foreseeable future and resolve remaining and future claims related to these policies. In the
event that actual reinsured losses increase unexpectedly or exceed actuarially determined estimated reinsured losses under
the program, the aggregate of such losses could materially increase our liability and adversely affect our financial condition,
liquidity, cash flows and results of operations. In addition, as the availability to us of certain traditional insurance coverage
diminishes or increases in cost, we will continue to evaluate the levels and types of insurance we include in our self-insurance
program. Any increase to this program increases our risk exposure and therefore increases the risk of a possible material
adverse effect on our financial condition, liquidity, cash flows and results of operations.
Any acquisition that we undertake could be difficult to integrate, disrupt our business, dilute stockholder value or have a
material adverse impact on our operating results.
We have made, and anticipate that we will continue making, strategic acquisitions as part of our growth strategy. We
have made a number of acquisitions since our inception. The success of these and other acquisitions depends in part on our
ability to integrate acquired companies into our business operations. There can be no assurance that the companies acquired
25
will continue to generate income at the historical levels on which we based our acquisition decisions, that we will be able to
maintain or renew the acquired companies’ contracts, that we will be able to realize operating and economic efficiencies upon
integration of acquired companies, or that the acquisitions will not adversely affect our results of operations or financial
condition.
We continually review opportunities to acquire other businesses that would complement our current services, expand
our markets or otherwise offer prospects for growth. In connection with our acquisition strategy, we could issue stock that
would dilute existing stockholders’ percentage ownership, or we could incur or assume substantial debt or contingent
liabilities. Acquisitions involve numerous risks, including, but not limited to, the following:
• challenges assimilating the acquired operations;
• unanticipated costs and known and unknown legal or financial liabilities associated with an acquisition;
• diversion of management’s attention from our core businesses;
• adverse effects on existing business relationships with customers;
• entering markets in which we have limited or no experience;
• potential loss of key employees of purchased organizations;
• the incurrence of excessive leverage in financing an acquisition;
• failure to maintain and renew contracts of the acquired business;
• unanticipated operating, accounting or management difficulties in connection with an acquisition; and
• dilution to our earnings per share.
We cannot assure you that we will be successful in overcoming problems encountered in connection with any
acquisition and our inability to do so could disrupt our operations and adversely affect our business.
International Risks
There are risks associated with our international operations that are different from the risks associated with our operations
in the US, and our exposure to the risks of a global market could hinder our ability to maintain and expand international
operations.
We have operation centers in Australia, Canada, France, Germany, Poland, Saudi Arabia, South Korea, Spain, Sweden,
Switzerland, the United Kingdom and the US. In implementing our international strategy, we may face barriers to entry and
competition from local companies and other companies that already have established global businesses, as well as the risks
generally associated with conducting business internationally. The success and profitability of international operations are
subject to numerous risks and uncertainties, many of which are outside of our control, such as:
• political or economic instability;
• changes in governmental regulation or taxation;
• currency exchange fluctuations;
• difficulties and costs of staffing and managing operations in certain foreign countries;
• work stoppages or other changes in labor conditions; and
• taxes and other restrictions on repatriating foreign profits back to the US
In addition, changes in policies and/or laws of the US or foreign governments resulting in, among other changes, higher
taxation, tariffs or similar protectionist laws could reduce the anticipated benefits of international operations and could have
a material adverse effect on our results of operations and financial condition. We have currency exposure arising from both
sales and purchases denominated in foreign currencies, including intercompany transactions outside the US, and we currently
do not conduct hedging activities. We cannot predict with precision the effect of future exchange-rate fluctuations on our
business and operating results, and significant rate fluctuations could have a material adverse effect on results of operations
and financial condition.
We operate and are in a taxable income position in multiple tax jurisdictions, and face the risk of double taxation if one
jurisdiction does not acquiesce to the tax claims of another jurisdiction.
We currently operate in the US and eleven foreign countries and are subject to income taxes in those countries and the
specific states and/or provinces where we operate. In the event one taxing jurisdiction disagrees with another taxing
jurisdiction, we could experience temporary or permanent double taxation and increased professional fees to resolve taxation
matters.
26
Item 1B.
Unresolved Staff Comments.
None.
Item 2.
Properties.
We lease our approximately 11,000 square foot corporate office building in Tucson, Arizona under a five-year lease,
with two additional three year renewal options. The lease is currently in its fifth year. The monthly base rental payment under
this lease as of December 31, 2014 in the amount of approximately $18,000 is subject to an annual Consumer Price Index
adjustment increase over the initial term of the lease. We also lease office space for other administrative services in Tucson.
The lease terms vary and are in line with market rates. In connection with the performance of our contracts, our NET Services
segment leases approximately 40 offices, our Human Services segment leases approximately 280 offices, our WD Services
segment leases approximately 170 offices and our HA Services segment leases approximately three offices. The lease terms
vary and are generally at market rates.
In the Human Services segment, we acquired a 5,760 square foot office building in Pottsville, Pennsylvania in
connection with the acquisition of Providence Community Services, Inc. (formerly known as Pottsville Behavioral
Counseling Group, Inc.), which is free of any mortgage. Additionally, with the acquisition of The ReDCo Group, Inc.
(“ReDCo”) we acquired approximately 40 buildings in Pennsylvania which are free from any mortgages.
In 2010, we purchased land and a 46,188 square foot four-story shell building adjacent to our corporate office for cash.
We utilize the building for certain information technology operations, and sublease or have sold other space within the
building. We believe that our properties are adequate for our current business needs, and believe that we can obtain adequate
space, if needed, to meet our foreseeable business needs.
Item 3. Legal Proceedings.
Although we believe we are not currently a party to any material litigation, we may from time to time become involved
in litigation relating to claims arising from our ordinary course of business. These claims, even if not meritorious, could result
in the expenditure of significant financial and managerial resources.
Item 4. Mine Safety Disclosures
Not applicable.
27
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
PART II
Securities.
Market for our common stock
Our common stock, $0.001 par value per share, our only class of common equity, has been quoted on NASDAQ under
the symbol “PRSC” since August 19, 2003. Prior to that time there was no public market for our common stock. As of
March 10, 2015, there were 52 holders of record of our common stock. The following table sets forth the high and low sales
prices per share of our common stock for the period indicated, as reported on NASDAQ Global Select Market:
2014
Fourth Quarter .................................................................................................. $
Third Quarter ................................................................................................... $
Second Quarter ................................................................................................. $
First Quarter ..................................................................................................... $
2013
Fourth Quarter .................................................................................................. $
Third Quarter ................................................................................................... $
Second Quarter ................................................................................................. $
First Quarter ..................................................................................................... $
High
Low
48.70 $
49.41 $
43.35 $
29.00 $
30.50 $
31.31 $
29.52 $
20.09 $
34.03
35.70
28.07
23.91
24.34
26.41
16.58
15.86
28
Stock Performance Graph
The following graph shows a comparison of the cumulative total return for our common stock, NASDAQ Health Index
and Russell 2000 Index assuming an investment of $100 in each on December 31, 2009.
Dividends
We have not paid any cash dividends on our common stock and do not plan to pay dividends on our common stock in
the foreseeable future. In addition, our ability to pay dividends is prohibited by the terms of our credit agreement. The payment
of future cash dividends, if any, will be reviewed periodically by the Board and will depend upon, among other things, our
financial condition, funds from operations, the level of our capital and development expenditures, any restrictions imposed
by present or future debt instruments and changes in federal tax policies, if any.
29
Issuer Purchases of Equity Securities
Period
Total
Number of
Shares of
Common
Stock
Purchased
as Part of
Publicly
Announced
Program
(2)
Maximum
Number of
Shares of
Common
Stock
that May
Yet Be
Purchased
Under the
Program
(2)
Total
Number
of Shares of
Common
Stock
Purchased
(1)
Average
Price
Paid per
Share
Fourth quarter:
October 1, 2014 to October 31, 2014 ...................................
November 1, 2014 to November 30, 2014 ............................
December 1, 2014 to December 31, 2014 .............................
Total ......................................................................................
_______________________
- $
157 $
432 $
-
44.39
36.92
-
-
-
243,900
243,900
243,900
589 $
38.91
-
243,900
(1) The shares repurchased were acquired from employees in connection with the settlement of income tax and related
benefit withholding obligations arising from vesting in restricted stock awards.
(2) Our board of directors approved a stock repurchase program in February 2007 for up to one million shares of our common
stock. As of December 31, 2014, we have spent approximately $14.4 million to purchase 756,100 shares of our common
stock on the open market under this program.
Equity Compensation Plan Information
The following table provides certain information as of December 31, 2014 with respect to our equity based
compensation plans.
(a)
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants and
rights
(b)
Weighted-
average exercise
price of
outstanding
options,
warrants and
rights
(c)
Number of
securities
remaining
available for
future issuance
under equity
compensation
plans (excluding
securities
reflected in
column (a))
Plan category
Equity compensation plans approved by security
holders(1)(2) ........................................................................
Equity compensation plans not approved by security holders ..
Total .........................................................................................
813,622
—
813,622
30.77
—
30.77
1,061,252
—
1,061,252
(1) Columns (a) and (b) include 813,622 shares issuable upon exercise of outstanding stock options.
(2) The number of shares shown in column (c) represents the number of shares available for issuance pursuant to stock
options and other stock-based awards that could be granted in the future under the 2006 Long-Term Incentive Plan, as
amended.
30
Item 6. Selected Financial Data.
The following table sets forth selected consolidated financial data, other financial data and other operating data. The
selected consolidated financial data for the years ended December 31, 2014, 2013 and 2012 and as of December 31, 2014
and 2013 are derived from our audited consolidated financial statements included elsewhere in this report. The selected
consolidated financial data for the years ended December 31, 2011 and 2010 and as of December 31, 2012, 2011 and 2010
are derived from our audited consolidated financial statements that are not included in this report. This information should
be read in conjunction with our consolidated financial statements and the related notes, and Item 7 “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” all of which are included elsewhere in this report.
2014
(1)(2)(3)
Year Ended December 31,
2012
(3)(6)
(dollars and shares in thousands, except per share data)
2013
(3)(4)(5)
2011
(7)(8)
2010
(7)
Statement of operations data:
Service revenue .................................................... $ 1,481,171 $ 1,122,682 $ 1,105,889 $
942,980 $
879,697
Operating expenses:
Service expense ................................................ 1,338,793 1,020,051 1,010,776
53,383
General and administrative expense .................
15,023
Depreciation and amortization ..........................
2,506
Asset impairment charges .................................
Total operating expenses ...................................... 1,438,831 1,084,048 1,081,688
Operating income .................................................
24,201
Non-operating (income) expenses
48,633
14,872
492
63,635
29,488
6,915
38,634
42,340
Interest expense, net .........................................
Loss on extinguishment of debt ........................
(Gain) on foreign currency translation ..............
(Gain) on bargain purchase ...............................
Income before income taxes .................................
Provision for income taxes ...................................
Net income .......................................................... $
14,600
-
(37)
-
27,777
7,502
20,275 $
6,894
525
-
-
31,215
11,777
19,438 $
7,508
-
-
-
16,693
8,211
8,482 $
843,824
48,861
13,656
-
906,341
36,639
10,002
2,463
-
(2,711)
26,885
9,945
16,940 $
763,281
46,461
12,652
-
822,394
57,303
16,011
-
-
-
41,292
17,665
23,627
Net earnings per share data:
Diluted .............................................................. $
1.35 $
1.41 $
0.64 $
1.27 $
1.78
Weighted average shares outstanding:
Diluted ..............................................................
15,019
13,810
13,355
13,322
14,965
31
2014 (1)
Year Ended December 31,
2012
2013
2011
Other data (9) (unaudited):
States served:
NET Services ...............................................
Human Services ............................................
HA Services ..................................................
Countries served:
WD Services .................................................
Locations:
NET Services ................................................
Human Services ............................................
WD Services .................................................
HA Services ..................................................
Employees:
NET Services ...............................................
Human Services ............................................
WD Services .................................................
HA Services ..................................................
Contracts:
NET Services ...............................................
Human Services ............................................
WD Services .................................................
HA Services ..................................................
Clients:
39
24
33
10
40
326
173
3
2,971
6,859
2,569
1,298
109
491
390
67
40
24
-
-
`
35
347
-
-
2,253
6,294
-
-
83
504
-
-
38
27
-
-
36
358
-
-
1,990
6,403
-
-
84
556
-
-
34
33
-
-
33
359
-
-
1,476
6,120
-
-
76
633
-
-
2010
38
32
-
-
34
273
-
-
1,430
5,553
-
-
66
638
-
-
NET Services (10) ......................................... 21,504,243 15,842,051 15,084,571 11,318,902 8,232,202
58,088
Human Services ............................................
-
WD Services .................................................
63,112
185,581
51,584
-
56,320
-
60,956
-
2014 (1)(2) 2013 (3)(4)
2011 (8)
2010
As of December 31,
2012 (3)
(dollars in thousands)
Balance sheet data:
Cash and cash equivalents .................................... $
160,406 $
Total assets ........................................................... 1,165,245
575,213
Long-term obligations, including current portion
368,618
Other liabilities .....................................................
221,414
Total stockholders' equity ....................................
98,995 $
424,758
123,500
150,621
150,637
55,863 $
391,737
130,000
143,050
118,687
43,184 $
379,053
150,493
119,537
109,023
61,261
386,933
182,304
115,880
88,749
(1) Two significant acquisitions were completed during 2014. We acquired Ingeus effective May 30, 2014 and we acquired
Matrix effective October 23, 2014. These acquisitions resulted in the creation of two new segments in 2014, WD Services
and HA Services. These acquisitions affected the comparability of the information reflected in the selected financial
data. See the year on year analysis included in Item 7 “Management’s Discussion and Analysis of Financial Condition
and Results of Operations” of this report for more information.
(2) On May 28, 2014 we entered into the first amendment to our credit facility which increased the aggregate amount of the
revolving credit facility from $165.0 million to $240.0 million, then, on October 23, 2014, we entered into the second
amendment to our credit facility which added an additional term loan in the amount of $250.0 million. Additionally, on
October 23, 2014, we entered into a 14.0% unsecured subordinated note in the aggregate principal amount of $65.5
million with a related party. The increases in our debt balances resulted in an increase in interest expense in 2014 over
2013. Additionally, 2014 includes approximately $4.5 million of financing fees that were deferred and fully expensed
in the fourth quarter of 2014 in relation to bridge financing commitments and approximately $3.0 million of third party
financing fees that are included in general and administrative expense.
(3) As a result of changes in British Columbia, we initiated intangible asset impairment valuations of our Canadian business
and, based on the results, we recorded impairment charges totaling approximately $2.5 million related to our intangible
assets other than goodwill for the year ended December 31, 2012. During 2013, the not-for-profit entities managed by
Rio Grande Management Company, L.L.C. (“Rio”), our wholly-owned subsidiary, were notified of the termination of
funding for certain of their services. Due to this change in funding, the not-for-profit entities Rio serves were not able to
32
maintain the level of business they historically experienced, which is expected to result in the decrease or elimination of
services provided by Rio. Based on these factors, we recorded a goodwill impairment charge of approximately $0.5
million for the year ended December 31, 2013. During 2014, we recorded impairment charges related to three Human
Services segment reporting units totaling $6.9 million as further discussed in Item 7 “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”.
(4) On August 2, 2013, we executed a new credit facility and paid all amounts due under the existing credit facility with
proceeds from the new credit facility. In conjunction with the termination of the previous credit facility, we recorded a
loss on extinguishment of debt in 2013 of approximately $0.5 million.
(5) We incurred expense (net of benefit of forfeiture of stock-based compensation) of approximately $1.3 million in 2013
for severance payments related to two of our executive officers and a key employee.
(6) We incurred expense (net of benefit of forfeiture of stock-based compensation) of approximately $1.3 million in 2012
for payments related to the retirement of two of our executive officers in 2012.
(7) As a result of our acquisition of ReDCo on June 1, 2011, we began consolidating the financial results of this entity,
which resulted in a decrease in management fees of approximately $1.1 million for 2011 as compared to 2010.
Additionally, this acquired entity contributed $20.3 million of home and community based service revenue during 2011.
(8) On March 11, 2011, we executed a new credit facility and paid all amounts due under the existing credit facility with
cash in the amount of $12.3 million and proceeds from the new credit facility. In conjunction with the termination of the
previous credit facility, we recorded a loss on extinguishment of debt in 2011 of approximately $2.5 million.
(9) “States served,” “Locations,” “Employees” and “Contracts” data are as of the end of the period for owned entities.
“Clients” data represents the number of clients served during the last month of the period presented for owned entities.
“States served” excludes the District of Columbia and Canada.
(10) NET services clients represent the number of individuals eligible to receive NET services.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations should be read in conjunction
with Item 6, “Selected Financial Data” and our consolidated financial statements and related notes included in Item 8 of
this report. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and
assumptions. Certain risks, uncertainties and other factors, including but not limited to those set forth in Item 1A, entitled,
“Risk Factors” and elsewhere in this report may cause actual results to differ materially from those projected in the forward-
looking statements.
Overview of Our Business
We arrange for and manage non-emergency transportation (“NET”) services, and provide behavioral health and other
human services, workforce development (“WD”) services and health assessment (“HA”) services. In response to the large
and growing population of eligible beneficiaries of government sponsored services, increasing pressure on governments to
control costs and increasing acceptance of privatized human services and managed care solutions, we have grown both
organically and through strategic acquisitions, including the acquisitions of Ingeus and Matrix during the second and fourth
quarters, respectively, of 2014.
As of December 31, 2014, we had approximately 21.5 million individuals eligible to receive services under our NET
business segment, and provide services directly to approximately 63,100 clients under our Human Services segment.
Additionally, we have provided services to nearly 185,600 clients under our WD Services segment, and provided
comprehensive health assessment (“CHA”) services across the US during 2014. Our NET Services segment provided services
from approximately 40 locations in 39 states and the District of Columbia as of December 31, 2014. Our Human Services
segment provided services from nearly 330 locations in 24 states, the District of Columbia, and three provinces in Canada as
of December 31, 2014. Our WD Services segment provided services from over 170 locations in Australia, France, Germany,
Poland, Saudi Arabia, South Korea, Spain, Sweden, Switzerland and the United Kingdom as of December 31, 2014. Our HA
Services segment provided services is 33 states with approximately 800 nurse practitioners as of December 31, 2014.
33
How We Grow our Business and Evaluate our Performance
Our business has grown internally through organic expansion into new markets and existing markets, increases in the
number of clients served under contracts that we or the entities we manage are awarded, and through strategic acquisitions.
With respect to our Human Services and WD Services business segments, we typically pursue organic expansion into markets
that are contiguous to our existing markets or where we believe we can quickly establish a significant presence. When we
expand organically into new markets, we typically have no clients or perform no management services in those markets
historically, and are required to incur start-up costs including building or lease costs, required permits and costs to attract and
train initial personnel. These costs are typically expensed as incurred, and our new offices often expect to incur losses for a
period of time until we adequately grow our revenue from clients. These initial losses are built in to our bid models and
forecasts, and are typically expected to be recouped on average over the life of the operation.
We continue to selectively identify and pursue strategic acquisitions of attractive businesses that are complementary to
our business strategies and current services and businesses in markets where we see opportunities for our existing services
but where we lack the contacts or market knowledge to make a successful organic entry.
In managing our business, we focus on several key performance indicators that are specific to the markets that we
operate in. Specifically, we focus on the number of clients served and the average rates we receive for our services, as those
particular metrics are the key drivers of our revenue performance. We also focus on our employee costs and number of
employees, outsourced transportation costs by contract, and cost per job placement as these items are our most significant
operating costs and the key to controlling our operating margins. In addition, we monitor EBITDA and Adjusted EBITDA
as key performance indicators of our financial performance. We intend to continue to focus on these and additional measures
going forward, and make changes in our cost structure where necessary to achieve our financial and operational goals. We
will also leverage our technology platforms where possible, and expand our shared services capability.
How We Earn our Revenue
NET Services
We provide NET management services under contracts with state Medicaid and local agencies, hospital systems or
private managed care organizations (“MCOs”). Most of our contracts for NET management services are capitated. This means
that we are paid on a per member, per month basis for each eligible member. We do not direct bill for services under capitated
contracts as revenue is based on the number of eligible members.
Human Services
Our Human Services revenue is primarily derived from provider contracts with state and local government agencies
and government intermediaries, health maintenance organizations (“HMOs”) and to a lesser extent, commercial insurers. The
government entities that pay for our services include welfare, child welfare and justice departments, public schools and state
Medicaid programs. For the majority of the contracts where we provide human services directly, we are paid on a fee for
service (“FFS”) basis. In other such arrangements, we receive a set monthly amount or we are paid amounts equal to the costs
we incur to provide agreed upon services.
WD Services
With the acquisition of Ingeus in May, 2014, we now provide workforce development services on a global basis that
include resume and job interview skills, networking and job placement services and technical job training through internally
staffed resources. Our client base for workforce development services is broad and includes long-term unemployed, disabled,
and unskilled individuals, as well as individuals that cope with medical illnesses, are newly graduated from educational
institutions, and those that have been released from incarceration after an extended length of time. We contract primarily with
government entities that seek to reduce the unemployment rate generally, or for targeted population cohorts. We are paid
largely based on job placement and job sustainment success, but are also paid attachment fees based on the admission of
clients into our programs, as well as incentive fees that are usually paid at the end of defined measurement periods based on
direct and indirect variables. We bill according to contractual terms, typically after proof of services have been achieved.
34
Approximately 68.0% of Ingeus’s revenues from May 30, 2014 to December 31, 2014 were derived from seven
standardized regional contracts with the Department of Work and Pension (“DWP”) under the Work Programme, whereby
services are provided to long-term unemployed individuals to place them into jobs. Under these contracts, which commenced
on April 2011 and continue through March 2016 with an additional two-year service period, Ingeus has historically been paid
a fixed amount for each referred client as follows:
• Attachment fees, which ceased on July 1, 2014, which were typically upfront payments that were payable when a
client was referred and entered the system;
• Job placement fees, which are typically payable when a client is employed, or job outcome fees, which are typically
payable when a client is employed, and remains employed for a specified period of time;
• Sustainment fees, which are typically payable upon certain employment tenure milestones (for example,
demonstrated continuing employment for up to 24 months); and
• Incentive payments, which are based on the achievement of certain global measures over four annual measurement
periods commencing April 1, 2014.
As noted above, attachment fees are no longer payable under the DWP contracts. As a result, going forward, Ingeus
will receive the majority of its revenue under these contracts only upon demonstrating the clients’ continued employment for
a substantial period of time and upon achievement of incentive measures over the defined measurements periods. However,
a substantial portion of the total cost of providing services to clients is incurred in the period between initial referral and job
placement. In general, under the DWP contract and most of its other current contracts, Ingeus invests significant sums of
money in personnel, leased office space, purchased or developed technology and other costs prior to commencing services.
It is expected that future contacts will be structured in a similar fashion. In addition, Ingeus does and may in the future incur
service delivery costs for significant periods of time before they receive payments under those contracts, leading to variability
in Ingeus financial performance between quarters and for comparative periods.
HA Services
With the acquisition of Matrix in October, 2014, we contract with health plans to provide CHA for their Medicare
Advantage (“MA”) members that meet certain pre-determined criteria as defined by the providers. A comprehensive health
assessment is a comprehensive physical examination of an individual performed by one of our physicians or nurse
practitioners (“NPs”). The health plans use the assessment reports created from the CHA examinations to impact care
management of the MA member, and to accurately report the cost of care of those members.
We have also introduced new product lines, including in-home screenings, Medication Therapy Management (“MTM”),
and analytic and physician services. Additionally, we contract directly with health plans and offer care management and
quality measure software for customer use.
Critical Accounting Policies and Estimates
General
In preparing our financial statements in accordance with accounting principles generally accepted in the United States
(“GAAP”) we are required to make estimates and judgments that affect the amounts reflected in our financial statements. We
base our estimates on historical experience and on various other assumptions we believe to be reasonable under the
circumstances. However, actual results may differ from these estimates under different assumptions or conditions.
Critical accounting policies are those policies most important to the portrayal of our financial condition and results of
operations. These policies require our most difficult, subjective or complex judgments, often employing the use of estimates
about the effect of matters inherently uncertain. Our most critical accounting policies pertain to revenue recognition, accounts
receivable and allowance for doubtful accounts, accounting for business combinations, goodwill and other intangible assets,
accrued transportation costs, loss reserves for certain reinsurance and self-funded insurance programs, stock-based
compensation and income taxes.
35
Revenue Recognition
NET Services segment
Capitation contracts. The majority of our NET services revenue is generated under capitated contracts where we assume
the responsibility of meeting the covered transportation requirements of a specific geographic population for a fixed amount
per period. Revenues under capitation contracts with our payers are based on per-member monthly fees for an estimated
number of participants in the payer’s program.
FFS contracts. Revenues earned under FFS contracts are recognized when the service is provided. Revenue under these
types of contracts is based upon contractually established billing rates, less allowance for contractual adjustments. Estimates
of contractual adjustments are based upon payment terms specified in the related agreements.
Flat fee contracts. Revenues earned under flat fee contracts are recognized ratably over the covered service period.
Revenues under these types of contracts are based upon contractually established monthly flat fees that do not fluctuate with
any changes in the membership population that can receive our services.
Human Services segment
FFS contracts. Revenue related to services provided under FFS contracts is recognized at the time services are rendered.
Such services are provided at established billing rates.
As services are rendered, contract-specific documentation is prepared describing each service, time spent, and billing
code to determine and support the value of each service provided and billed. The timing and amount of collection are
dependent upon compliance with the billing requirements specified by each payer. Failure to comply with these requirements
could delay the collection of amounts due to us under a contract or result in adjustments to amounts billed.
The performance of our contracts is subject to the condition that sufficient funds are appropriated, authorized and
allocated by each state, city or other local government. If sufficient appropriations, authorizations and allocations are not
provided by the respective state, city or other local government, we are at risk for uncollectible amounts or immediate
termination or renegotiation of the financial terms of our contracts.
Cost-based service contracts. Revenues from our cost-based service contracts are recorded based on a combination of
allowable direct costs, indirect overhead allocations, and stated allowable margins on those incurred costs. These revenues
are compared to annual contract budget limits and, depending on reporting requirements, reductions of revenue may be
recorded for certain contingencies. We annually submit projected costs for the coming year, which assist the contracting
payers in establishing the annual contract amount to be paid for services provided under the contracts. We submit monthly
cost reports which are used by the payers to determine the need for any payment adjustments. Completion of the cost report
review process may range from one month to several years. In cases where funds paid to us exceed the allowable costs to
provide services under contract, we may be required to repay amounts previously received.
Our cost reports are generally audited by payers annually. We periodically review our provisional billing rates and
allocation of costs and provide for estimated payment adjustments. We believe that adequate provisions have been made in
our consolidated financial statements for any material adjustments that might result from the outcome of any cost report
audits. Differences between the amounts provided and the settlement amounts are recorded in our consolidated statement of
income in the year of settlement. Such settlements have historically not been material.
Annual block purchase contract. Our annual block purchase contract requires us to provide or arrange for behavioral
health services to eligible populations of beneficiaries as defined in the contract. We must provide a complete range of
behavioral health clinical, case management, therapeutic and administrative services. We are obligated to provide services
only to those clients with a demonstrated medical necessity. Our annual funding allocation amount may be increased when
our patient service encounters exceed the contract amount; however, such increases are subject to government appropriation.
There is no contractual limit to the number of eligible beneficiaries that may be assigned to us, or a specified limit to the level
of services that may be provided to these beneficiaries if the services are deemed to be medically necessary. Therefore, we
are at-risk if the costs of providing necessary services exceed the associated reimbursement.
The terms of the contract may be reviewed prospectively and amended as necessary to ensure adequate funding of our
contractual obligations; however, there is no assurance that amendments will be approved or that funding will be adequate.
36
Workforce Development Services Segment
Revenues from our workforce development services are generated from providing resume and job interview skills,
networking and job placement services, and technical job training through internally staffed or outsourced resources.
Our revenue is largely based on successful job placement and sustainment outcomes. While the specific terms vary by
contract and country, we generally receive four types of revenue streams under our contracts with government entities:
attachment fees, job placement/job outcome fees, sustainment fees and incentive fees. Attachment fees are typically upfront
payments that are payable when a client enters the program. Job placement fees are typically payable when a client is
employed, and job outcome fees are typically payable when a client is employed and remains employed for a specified period
of time. Sustainment fees are typically payable upon certain employment tenure milestones, such as monthly payments for
sustained employment past a specified time period. Finally, incentive fees are typically based upon a calculation that includes
a variety of factors and inputs, such as average sustainment rates and client referral rates, and is often cumulative in nature.
Revenue generally is recognized ratably over the period from attachment to when services are provided, as is the case
for attachment fees, or when certain milestones are achieved, as is the case with job placement/job outcome fees, and
sustainment fees. Incentive fees are generally recognized when the revenue is fixed and determinable, frequently at the end
of the cumulative calculation period, unless the contractual terms allow for earned payments on a fixed or ratable basis.
Health Assessment Services Segment
The HA Services segment contracts with health plans to provide clinical assessments for their MA members that meet
certain pre-determined criteria as defined by the providers. Revenue is recognized in the period in which the services are
rendered.
Deferred Revenue
At times we may receive funding for certain services in advance of services being rendered, or the revenue being
realizable. These amounts are reflected in the accompanying consolidated balance sheets as deferred revenue until the services
are rendered, or the revenue is realizable.
Accounts Receivable and Allowance for Doubtful Accounts
Clients are referred to us primarily through governmental programs and by commercial insurance companies, and we
only provide services at the direction of a payer under a contractual arrangement. These circumstances have historically
minimized any uncollectible amounts for services rendered. However, not all amounts recorded as accounts receivable will
ultimately be collected.
We record all accounts receivable amounts at their contracted amount, less an allowance for doubtful accounts. We
maintain an allowance for doubtful accounts at an amount we estimate to be sufficient to cover the risk that an account will
not be collected. We regularly evaluate our accounts receivable, especially receivables that are past due, and reassess our
allowance for doubtful accounts based on specific client collection issues. In circumstances where we are aware of a specific
payer’s inability to meet its financial obligation, we record a specific addition to our allowance for doubtful accounts to
reduce the net recognized receivable to the amount we reasonably expect to collect.
Our write-off experience for 2014, 2013 and 2012 was less than 1.0% of revenue.
Accounting for Business Combinations, Goodwill and Other Intangible Assets
When we consummate an acquisition we separately value all acquired identifiable intangible assets apart from goodwill
in accordance with Accounting Standards Codification, or ASC, Topic 805 - Business Combinations. We analyze the carrying
value of goodwill at the end of each fiscal year through an impairment analysis performed in the first quarter of the following
year. When analyzing goodwill for impairment we first assess qualitative factors to determine whether it is necessary to
perform the two-step quantitative goodwill impairment test described below. If we determine, based on a qualitative
assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then we would
calculate the fair value of the reporting unit and perform the two-step quantitative goodwill impairment test. In connection
with our year-end asset impairment test, we reconcile the aggregate fair value of our reporting units to our market
capitalization including a reasonable control premium. As part of this annual impairment test, we also compare the fair value
of each reporting unit with its carrying value, including goodwill. If the carrying amount of a reporting unit exceeds its fair
37
value, there is an indication of impairment. If an indication of impairment is identified, the impairment loss, if any, is
measured by comparing the implied fair value of the reporting unit’s goodwill with its carrying value. In calculating the
implied fair value of the reporting unit goodwill, the fair value of the reporting unit is allocated to all of the other assets and
liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the amount assigned to
its other identifiable assets and liabilities is the implied fair value of goodwill. An impairment loss would be recognized when
the carrying value of goodwill exceeds its implied fair value.
Similarly conducted interim impairment tests may also be required in advance of our annual impairment test if events
occur or circumstances change that would more likely than not reduce the fair value, including goodwill, of one or more of
our reporting units below the reporting unit’s carrying value. Such circumstances could include but are not limited to: (1) loss
of significant contracts, (2) a significant adverse change in regulations applicable to our business or in the climate of our
business, (3) unanticipated competition, (4) an adverse action or assessment by a regulator, or (5) a significant decline in our
stock price.
In determining whether or not we had goodwill impairment to report for the years ended December 31, 2014, 2013 and
2012, we considered both a market-based valuation approach and an income-based valuation approach when estimating the
fair values of our reporting units with goodwill balances as of such dates. The valuation methodology applied in 2014 was
consistent with our methodology in 2013 and 2012. Under the market approach, the fair value of the reporting unit is
determined using one or more methods based on current values in the market for similar businesses. Under the income
approach, the fair value of the reporting unit is based on the cash flow streams expected to be generated by the reporting unit
over an appropriate period and then discounting the cash flows to present value using an appropriate discount rate. The
income approach is dependent on a number of significant management assumptions, including estimates of future revenue
and expenses, growth rates and discount rates. Inherent in such fair value determinations are certain judgments and estimates
relating to future cash flows, including our interpretation of current economic indicators and market valuations, and
assumptions about our strategic plans with regard to our operations. To the extent additional information arises, market
conditions change or our strategies change, it is possible that our conclusion regarding whether existing goodwill is impaired
could change and result in a material adverse effect on our consolidated financial position or results of operations.
In conjunction with our annual review of goodwill impairment as of December 31, 2014, we performed the two-step
impairment analysis and determined that goodwill was impaired for two of our Human Services segment reporting units. The
goodwill impairment in the Maple Star reporting unit was attributable to declines in forecasted referrals, leading to a decline
in projected future cash flows of the entity. We recorded an impairment charge of $3.8 million related to the Maple Star
reporting unit. The impairment for the second reporting unit was attributable to lower than expected performance during 2014
in the Providence of Idaho reporting unit, as well as a lower than expected projections in future years. An impairment charge
of $2.8 million was recorded related to the Providence of Idaho reporting unit.
Additionally, based on a triggering event for one of our other Human Services segment reporting units, we recorded a
goodwill impairment charge of approximately $0.3 million prior to conducting our annual asset impairment test.
Also in conjunction with its annual review of goodwill impairment as of December 31, 2014, the Company performed
the two-step analysis of its Ingeus reporting unit. After completing step one, the Company concluded the fair value of the
reporting unit was less than its carrying value, requiring the Company to proceed to the second step of the two-step goodwill
impairment test. As part of the Step 2 analysis, the Company analyzed its long-term assets, including property, plant and
equipment, and its intangible assets. Based on this review, it was determined that the undiscounted cash flows from the
reporting unit exceeded its carrying value. However, in determining the implied fair value of goodwill for the Ingeus reporting
unit, the assigned fair value of the Ingeus reporting unit’s intangible assets as of December 31, 2014 was $13.7 million less
than the carrying value. In accordance with ASC 350, the assignment of fair value to the assets and liabilities of the reporting
unit is solely for the purpose of testing goodwill for impairment, the assets and liabilities of the reporting unit are not written
up or down as a result of the allocation process. Based on the two-step analysis described above, the Company concluded the
implied fair value of the Ingeus reporting unit goodwill exceeded its carrying value by $18.5 million. Accordingly, the
Company concluded there was no impairment in its Ingeus reporting unit goodwill, and did not recognize any charges related
to goodwill impairment as of December 31, 2014.
The Company believes the assumptions used in our discounted cash flow analysis are appropriate and result in
reasonable estimates of the implied fair value of each reporting unit. We further believe the most significant assumptions
used in our analysis are the expected revenue growth, margins and overall profitability of its reporting units. However, we
may not meet our revenue growth and profitability targets, working capital needs and capital expenditures may be higher
than forecast, changes in credit or equity markets may result in changes to our discount rate and general business conditions
may result in changes to our terminal value assumptions for our reporting units. The amount of goodwill associated with
Ingeus was $32.9 million at December 31, 2014.
38
As of December 31, 2014, other than the Human Services segment reporting units discuss above, the fair values of our
reporting units subject to quantitative testing substantially exceeded their carrying values.
Based on our annual asset impairment test completed as of December 31, 2013 and 2012 we determined that no goodwill
was impaired as of such dates. However, in 2013, we recorded a goodwill impairment charge of approximately $0.5 million
as of June 30, 2013.
In connection with our acquisitions, we calculate the fair value of any management contracts, customer relationships,
restrictive covenants, trademarks and trade names, software licenses and developed technology. We assess whether any
relevant factors limit the period over which acquired assets are expected to contribute directly or indirectly to future cash
flows for amortization purposes and determine an appropriate useful life for acquired customer relationships based on the
expected period of time we will provide services to the payer. While we use discounted cash flows to value intangible assets,
we have elected to use the straight-line method of amortization to determine amortization expense. If applicable, we assess
the recoverability of the unamortized balance of our long-lived assets based on undiscounted expected future cash flows. If
the review indicates that the carrying value is not fully recoverable, the excess of the carrying value over the fair value of any
long-lived asset is recognized as an impairment loss.
As of December 31, 2014 and 2013, we determined that there was no impairment of intangible assets.
Accrued Transportation Costs
Transportation costs are estimated and accrued in the month the services are rendered by contracted transportation
providers, and are determined using gross reservations for transportation services less cancellations, and average costs per
transportation service by customer contract. Average costs per contract are determined by historical cost trends. Actual costs
relating to a specific accounting period are monitored and compared to estimated accruals. Adjustments to those accruals are
made based on reconciliations with actual costs incurred.
Loss Reserves for Certain Reinsurance and Self-Funded Insurance Programs
We reinsure a substantial portion of our NET Services’ and Human Services’ automobile, general and professional
liability and workers’ compensation costs under reinsurance programs through our wholly-owned subsidiary Social Services
Providers Captive Insurance Company (“SPCIC”). SPCIC is a licensed captive insurance company domiciled in the State of
Arizona. SPCIC maintains reserves for obligations related to our reinsurance programs for our automobile, general and
professional liability and workers’ compensation coverage.
As of December 31, 2014 and 2013, SPCIC had reserves of approximately $12.8 million and $10.6 million, respectively,
for the automobile, general and professional liability and workers’ compensation programs.
In addition, we own Provado Insurance Services, Inc. (“Provado”), a licensed captive insurance company domiciled in
the State of South Carolina. Provado historically provided reinsurance for policies written by a third party insurer for general
liability, automobile liability, and automobile physical damage coverage to various members of the network of subcontracted
transportation providers and independent third parties within our NET Services operating segment. Effective February 15,
2011, Provado has not renewed its reinsurance agreement and will not assume additional liabilities for policies commencing
thereafter. It continues to administer existing policies for the foreseeable future and to resolve remaining and future claims
related to these policies.
Provado maintains reserves for obligations related to the reinsurance programs for general liability, automobile liability,
and automobile physical damage coverage. As of December 31, 2014 and 2013, Provado had reserves of approximately $1.4
million and $1.9 million, respectively.
We utilize analyses prepared by third party administrators and independent actuaries based on historical claims
information with respect to the general and professional liability coverage, workers’ compensation coverage, automobile
liability, and automobile physical damage to determine the amount of required reserves.
We also maintain a self-funded health insurance program provided to our NET Services’ and Human
Services’ employees. With respect to this program, we consider historical and projected medical utilization data when
estimating our health insurance program liability and related expense as well as using services of a third party administrator.
As of December 31, 2014 and 2013, we had approximately $2.0 million and $1.9 million, respectively, in reserve for our
self-funded health insurance programs.
39
We regularly analyze our reserves for incurred but not reported claims, and for reported but not paid claims related to
our reinsurance and self-funded insurance programs. We believe our reserves are adequate. However, significant judgment
is involved in assessing these reserves such as assessing historical paid claims, average lags between the claims’ incurred
date, reported dates and paid dates, and the frequency and severity of claims. There may be differences between actual
settlement amounts and recorded reserves and any resulting adjustments are included in expense once a probable amount is
known. There were no significant prior period adjustments recorded in the periods covered by this report.
Stock-Based Compensation
We follow 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. With
respect to stock option awards, the fair value is estimated on the date of grant using the Black-Scholes option-pricing formula
and amortized over the option’s vesting periods. The Black-Scholes option-pricing formula requires us to make assumptions
for the expected dividend yield, stock price volatility, life of options and risk-free interest rate.
We follow the short-cut method prescribed by ASC 718 to calculate our pool of excess tax benefits available to absorb
tax deficiencies recognized subsequent to the adoption of ASC 718 (“APIC pool”). There was no effect on our financial
results for 2014, 2013 or 2012 related to the application of the short-cut method to determine our APIC pool balance.
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 will be in effect when the differences are expected to reverse. We record a valuation allowance
which includes amounts for net operating loss and tax credit carryforwards for which we have 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.
We recognize interest and penalties related to income taxes as a component of income tax expense.
Foreign currency translation
Local currencies generally are considered the functional currencies outside the US. Assets and liabilities for operations
in local-currency environments are translated at month-end exchange rates of the period reported. Income and expense items
are translated at the average exchange rate for each applicable month. Cumulative translation adjustments are recorded as a
component of accumulated other comprehensive income (loss) in stockholders’ equity.
Results of operations
Segment reporting. Our financial operating results are organized and reviewed by our chief operating decision maker
along our service lines in four reportable segments: NET Services, Human Services, WD Services and HA Services. We
operate these reportable segments as separate divisions and differentiate the segments based on the nature of the services they
offer.
40
Consolidated Results
The following table sets forth the percentage of consolidated total revenues represented by items in our consolidated
statements of income for the periods presented:
Year Ended December 31,
2013
2012
2014
Revenues:
Non-emergency transportation services .........................................
Human services .............................................................................
Workforce development services ..................................................
Health assessment services ............................................................
Total revenues ...............................................................................
Operating expenses:
Cost of non-emergency transportation services .............................
Client service expense ...................................................................
Workforce development service expense ......................................
Health assessment service expense ................................................
General and administrative expense ..............................................
Depreciation and amortization .......................................................
Asset impairment charge ...............................................................
Total operating expenses ...............................................................
59.7%
25.3
12.1
2.9
100.0
54.0
23.2
10.8
2.4
4.3
2.0
0.4
97.1
68.6%
31.4
-
-
100.0
63.3
27.6
-
-
4.3
1.3
-
96.5
Operating income ..............................................................................
2.9
3.5
Non-operating expense:
Interest expense, net .......................................................................
Loss on foreign currency translation ..............................................
Loss on extinguishment of debt ......................................................
Income before income taxes ..............................................................
Provision for income taxes ................................................................
Net income ........................................................................................
Overview of trends of our results of operations for 2014
1.0
-
-
1.9
0.5
1.4%
0.6
-
0.1
2.8
1.1
1.7%
67.9%
32.1
-
-
100.0
63.9
27.5
-
-
4.8
1.4
0.2
97.8
2.2
0.7
-
-
1.5
0.7
0.8%
Our NET Services revenues for 2014 as compared to 2013 were favorably impacted by new contracts and expansion in
certain markets. The results of operations for 2014 as compared to 2013 included an increase in revenue of 14.8% due
primarily to new business, while the cost of transportation as a percentage of non-emergency transportation services revenue
decreased to 90.5% during 2014 as compared to 92.2% during 2013, due primarily to lower utilization of transportation
services than historical trends.
Our Human Services revenues for 2014 as compared to 2013 increased 6.2% and were favorably impacted by contracts
that began in 2013 and were fully implemented in 2014. Client service payroll and related costs also increased in 2014 from
2013 by 7.4%. However, we experienced a 44.0% increase in client service purchased services costs in 2014 compared to
2013. This increase in client services purchased service costs was due to higher than expected foster care expenses in our
Texas contract, which was terminated during the third quarter of 2014.
Our WD Services revenues for 2014 were $179.3 million. Workforce development service expenses comprised 89.3%
of workforce development services revenue. We expect this ratio will fluctuate from period to period based upon contract
milestones and start-up costs of most workforce development contracts. Our WD Services results include the time period of
May 30, 2014 to December 31, 2014.
Our HA Services revenues for 2014 were $43.3 million. Health assessment service expenses comprised 81.2% of health
assessment services revenue. Our HA Services results include the time period of October 23, 2014 to December 31, 2014.
41
We also experienced increases in general and administrative expenses, depreciation and amortization, and interest
expense as a result of our acquisitions of Ingeus and Matrix during the year and the related debt incurred to fund the
acquisitions. In addition, we experienced a reduction of expenses related to an adjustment in the estimated fair value of
contingent consideration related to the Ingeus acquisition as of December 31, 2014.
Year ended December 31, 2014 compared to year ended December 31, 2013
Revenues
Service revenue is comprised of the following (in thousands):
Non-emergency transportation services ................................ $
Human services .....................................................................
Workforce deveopment services ...........................................
Health assessment services ....................................................
2014
884,287 $
374,245
179,308
43,331
2013
770,246 $
352,436
-
-
Year Ended December 31,
Dollar
change
Percent
change
114,041
21,809
179,308
43,331
14.8%
6.2%
Total Services revenue ....................................................... $ 1,481,171 $ 1,122,682 $
358,489
31.9%
Non-emergency transportation services. Non-emergency transportation services revenues were as follows (in
thousands):
Year Ended December 31,
2013
2014
Dollar
change
Percent
change
$
884,287 $
770,246 $
114,041
14.8%
The major drivers of the increase in NET Services revenues in 2014 include increased membership under our New
Jersey contract, a new contract with the state of Rhode Island, additional lives added under both new and expanded contracts
in Michigan, implementation of various new managed care contracts across the country, and expansion of our contract with
the states of Maine and Texas. Additional membership increases were experienced in a number of other states such as
Delaware, Georgia, Nevada and South Carolina. This revenue growth was partially offset by the elimination of our contracts
in Wisconsin, Mississippi, and Hartford, Connecticut.
A significant portion of this revenue was generated under capitated contracts where we assumed the responsibility of
meeting the covered transportation requirements of beneficiaries residing in a specific geographic region for fixed payment
amounts per beneficiary. Due to the fixed revenue stream and variable expense structure of our NET Services operating
segment, expenses related to this segment vary with seasonal fluctuations. We expect our operating results will continue to
fluctuate on a quarterly basis.
Human services. Human services revenues are comprised of the following (in thousands):
Home and community based services ................................... $
Foster care services ...............................................................
Management fees ..................................................................
2014
319,473 $
53,295
1,477
2013
305,616 $
38,490
8,330
Year Ended December 31,
Dollar
change
Percent
change
13,857
14,805
(6,853)
4.5%
38.5%
-82.3%
Total human services revenues .......................................... $
374,245 $
352,436 $
21,809
6.2%
Home and community based services. Home and community based services revenue increased in 2014 from 2013
primarily due to revenue derived from an acquired entity in Idaho of approximately $6.3 million and an acquired entity in
Massachusetts of approximately $2.3 million. Additionally, significant growth in Maine and Delaware have had a favorable
impact on revenue.
Foster care services. Our foster care services revenues increased in 2014 from 2013 primarily as a result of our foster
care contract in Texas that began in 2013. Although we generated increased foster care service revenue under this contract,
costs under the contract were higher than expected, and as such, we exited the contract in 2014. We expect to see a decline
in foster care services revenue in 2015 as compared to 2014.
42
Management fees. The exit of, and changes to, certain management service agreements resulted in decreased
management fees in 2014 as compared to 2013. We do not expect management fee revenue to be a significant portion of our
business going forward.
Workforce development services. WD Services revenue was as follows (in thousands):
Year Ended December 31,
2014
2013
Dollar
change
$
179,308 $
- $
179,308
WD services revenue represents revenue attributable to Ingeus, which we acquired on May 30, 2014. The 2014 revenue
includes seven months of revenue derived from providing international outsourced employability programs.
Health assessment services. HA Services revenue was as follows (in thousands):
Year Ended December 31,
2014
2013
Dollar
change
$
43,331 $
- $
43,331
HA services revenue represents revenue attributable to Matrix, which we acquired on October 23, 2014. The 2014
revenue includes revenue from October 23, 2014 to December 31, 2014 primarily derived from providing CHAs.
Operating expenses
Service Expense.
Service expense is comprised of the following (in thousands):
Cost of non-emergency transportation services .................... $
Human service expense .........................................................
Workforce development service expense ..............................
Health assessment service expense .......................................
2014
800,155 $
343,253
160,200
35,185
2013
710,428 $
309,623
-
-
Year Ended December 31,
Dollar
change
Percent
change
89,727
33,630
160,200
35,185
12.6%
10.9%
Total Service expense ........................................................ $ 1,338,793 $ 1,020,051 $
318,742
31.2%
Cost of non-emergency transportation services. Non-emergency transportation services expenses included the
following for 2014 and 2013 (in thousands):
Year Ended December 31,
Purchased services ................................................................ $
Payroll and related costs ........................................................
Other operating expenses ......................................................
Stock-based compensation ....................................................
Total cost of non-emergency transportation services ............ $
2014
657,680 $
111,212
30,676
587
800,155 $
2013
591,538 $
92,549
25,261
1,080
710,428 $
Dollar
change
Percent
change
66,142
18,663
5,415
(493 )
89,727
11.2%
20.2%
21.4%
-45.6%
12.6%
Purchased services. We subcontract with third party transportation providers to provide non-emergency transportation
services to our clients. The increase in purchased services for 2014 compared to 2013 is attributable to additional purchased
service costs for our expanded business and new contracts covering Hawaii, Kansas, Louisiana, Maine, Michigan, New
Mexico, Ohio, Texas, Rhode Island, New York, and Utah, as well as further expansion in the California commercial and
managed care markets. These increases were partially offset by decreases related to the termination of a contract with the
City of Hartford, several managed care contracts, our Wisconsin contracts, and the State of Mississippi Medicaid and End
Stage Renal contracts. Additional decreases in purchase services costs were caused by the transition to an administrative
services only contract in Connecticut and reduced transportation utilization due to inclement weather. As a percentage of
NET Services revenue, purchased services decreased to approximately 74.4% for 2014, from 76.8% for 2013. This decline
in purchased service expense as a percent of NET Services revenue is due to the membership expansion in existing contracts
with lower utilization levels than the historical trend.
43
Payroll and related costs. The increase in payroll and related costs of our NET Services segment for 2014 as compared
to 2013 was due to the hiring of additional staff for new contracts in Maine, Texas and Utah, expansion efforts across several
other markets, and additional staffing needed for expansion of the California ambulance commercial and managed care lines
of business. Additional hiring of staff is also reflected in the last quarter of 2014 in implementing contracts that have gone
live in first quarter of 2015. Payroll and related costs, as a percentage of NET Services revenue, increased to 12.6% for 2014
from 12.0% for 2013, due to the addition of call center staff to ensure our compliance with administrative and intake response
time requirements of some of our new contracts, as well as the transition of the Connecticut contract from a full risk contract
to administrative services only contract. All of these activities resulted in higher payroll and related costs as a percentage of
consolidated revenue.
Other operating expenses. Other operating expenses increased for 2014 as compared to 2013 primarily due to additional
business taxes in expanding markets, travel and implementation cost related to new business as well as costs related to the
deployment of our new centralized reservation system. During 2014, the NET Services segment undertook a redesign of its
reservation system architecture transitioning from individual market switches to one centralized hub offering greater
efficiencies as well as standard consistency throughout our segment. This involved a deployment schedule of over nine
months which commenced in July 2014 and contributed to higher travel and implementation cost for the segment. Other
operating expenses as a percentage of NET Services revenues were 3.5% for 2014 and 3.3% for 2013.
Stock-based compensation. Stock-based compensation expense was approximately $0.6 million and $1.1 million for
2014 and 2013, respectively. This item was primarily comprised of the amortization of the fair value of stock options and
restricted stock awarded to employees of our NET Services segment under our 2006 Plan, as well as benefits and costs related
to performance restricted stock units granted to an executive officer and a key employee.
Human service expense. Human service expense included the following for the years ended December 31, 2014 and
2013 (in thousands):
Year Ended December 31,
Payroll and related costs ........................................................ $
Purchased services ................................................................
Other operating expenses ......................................................
Stock-based compensation ....................................................
Total client service expense ............................................... $
2014
246,445 $
39,965
56,837
6
343,253 $
2013
229,452 $
27,748
51,792
631
309,623 $
Dollar
change
Percent
change
16,993
12,217
5,045
(625)
33,630
7.4%
44.0%
9.7%
-99.0%
10.9%
Payroll and related costs. Approximately $7.2 million of the increase in payroll and related costs is attributable to two
human services businesses acquired during 2014. The remaining increase in payroll and related costs from 2013 to 2014 is
primarily due to costs related to the termination of an executive officer and increased headcount in certain markets, including
North Carolina, Maine, Virginia and Delaware. Payroll and related costs as a percentage of revenue of our Human Services
segment were 65.9% for 2014 and 65.1% for 2013.
Purchased services. We incur a variety of support service expenses in the normal course of our domestic business,
including foster parent payments, pharmacy payments and out-of-home placements. In addition, we subcontract with a
network of providers for a portion of the legacy workforce development services we provide. In 2014, we experienced an
increase in foster parent payments of approximately $15.6 million. This increase was primarily related to our contract in
Texas that began in 2013 and was terminated in the third quarter of 2014. We additionally incurred approximately $1.4
million less in expenses for out-of-home placements in 2014, primarily due to decreased utilization in Arizona. Expenses
related to workforce development also decreased approximately $1.3 million from 2013 due primarily to the reclassification
of certain cost reimbursements to other operating expenses. Purchased services, as a percentage of our Human Services
segment revenues increased to 10.7% for 2014, up from 7.9% for 2013 due to the impact of foster parent payments relative
to the level of related revenue.
Other operating expenses. Other operating expenses, as a percentage of revenue of our Human Services segment,
increased to 15.2% for 2014 from 14.7% for 2013.
Stock-based compensation. Stock-based compensation for 2014 includes a benefit from the forfeiture of stock related
awards for a terminated executive officer. For both periods, this item includes the amortization of the fair value of stock
options and restricted stock awarded to key employees under our 2006 Plan, as well as benefits and costs related to
performance restricted stock units.
44
Workforce development service expense. Workforce development service expense, for our WD Services segment, was
as follows (in thousands):
Year Ended December 31,
2014
2013
Dollar
change
Payroll and related costs ..................................................................... $
Purchased services .............................................................................
Other operating expenses ...................................................................
Stock-based compensation .................................................................
Total workforce development service expense ............................... $
90,229 $
46,939
19,600
3,432
160,200 $
- $
-
-
-
- $
90,229
46,939
19,600
3,432
160,200
Payroll and related costs. The payroll and related costs of Ingeus totaled $90.2 million. Payroll and related costs of our
WD Services segment as a percentage of WD Services segment revenue, were 50.3% for 2014.
Purchased services. We subcontract with a network of providers for a portion of the workforce development services
we provide. Our 2014 results include $46.9 million of purchased services expense related to Ingeus. Purchased services of
our WD Service segment, as a percentage of our WD Services segment revenue, was 26.2% for 2014.
Other operating expenses. Other operating expenses of our WD Services segment, as a percentage of WD Services
segment revenue, were 10.9% for 2014. Other operating expenses include, among other things, administrative, travel,
information technology and client related expenses.
Stock-based compensation. Stock-based compensation was approximately $3.4 million for 2014. This item primarily
includes the expense related to the amortization of the fair value of restricted stock awards issued in connection with the
acquisition of Ingeus.
Health assessment service expense. Health assessment service expense, for our HA Services segment, was as follows
(in thousands):
Year Ended December 31,
2014
2013
Dollar
change
Payroll and related costs ............................................................... $
Purchased services .......................................................................
Other operating expenses .............................................................
Total health assessment service expense .................................. $
27,571 $
356
7,258
35,185 $
- $
-
-
- $
27,571
356
7,258
35,185
Payroll and related costs. The payroll and related costs of Matrix totaled $27.6 million. Payroll and related costs of our
HA Services segment as a percentage of HA Services segment revenue, were 63.6% for 2014.
Purchased services. Purchased services of our HA Service segment, as a percentage of our HA Services segment
revenue, was 0.8% for 2014.
Other operating expenses. Other operating expenses of our HA Services segment, as a percentage of HA Services
segment revenue, were 16.8% for 2014. Other operating expenses include, among other things, administrative, travel,
information technology and contract implementation expenses.
General and administrative expense. General and administrative expenses were as follows (in thousands):
Year Ended December 31,
2013
2014
Dollar
change
$
63,635 $
48,633 $
15,002
Percent
change
30.8%
The increase in general and administrative expenses for 2014 as compared to 2013 was primarily a result of
approximately $11.8 million in acquisition related costs, $3.0 million in third party fees related to our debt financing and $0.8
million in integration and restructuring costs incurred during 2014. Additionally, there was an increase in stock based
compensation expense of approximately $2.2 million and $1.5 million related to stock options and stock appreciation rights,
respectively, primarily due to awards granted to an executive officer, key employees and a director for efforts made in
connection with the Ingeus and Matrix acquisitions during the third quarter of 2014, one-third of which vested upon grant.
45
In addition, we incurred approximately $12.2 million in facility costs related to Ingeus, $0.4 million in facilities costs related
to Matrix, and an increase of approximately $2.2 million in other facility costs during 2014, which are included in general
and administrative expense. These increases were partially offset by an adjustment in the estimated fair value of contingent
consideration related to the Ingeus acquisition of approximately $16.1 million. Additionally, there was a decrease in payroll
and related costs of approximately $3.4 million, primarily attributable to changes in management service agreements. General
and administrative expense, as a percentage of revenue, remained constant at 4.3% in 2014 and 2013.
Depreciation and amortization. Depreciation and amortization were as follows (in thousands):
Year Ended December 31,
2013
2014
Dollar
change
$
29,488 $
14,872 $
14,616
Percent
change
98.3%
As a percentage of revenues, depreciation and amortization was approximately 2.0% and 1.3% for 2014 and 2013,
respectively. The increase in depreciation and amortization in 2014 as compared to 2013 was primarily due to the amortization
of intangible assets acquired through acquisitions in 2014 totaling approximately $9.0 million for 2014. Additionally, Ingeus
incurred depreciation expense of $4.0 million in 2014 and Matrix incurred depreciation expense of $0.6 million in 2014.
Asset impairment charge. Asset impairment charges were as follows (in thousands):
Year Ended December 31,
2013
2014
Dollar
change
$
6,915 $
492 $
6,423
Percent
change
1305.5%
At the end of 2014, prior to our annual impairment testing, we determined we would not seek to renew one of our
management agreements that ends in June 2016. Due to this triggering event, we initiated an analysis of the fair value of
goodwill and determined that goodwill related to one of our Human Services segment reporting units was impaired. Based
on this determination, we recorded a non-cash charge of approximately $0.3 million as of December 31, 2014 to reduce the
carrying value of the related goodwill to zero. Additionally, based on the results of our annual impairment test, we recorded
an asset impairment charge of approximately $6.6 million for two of our Human Services segment reporting units.
In connection with preparing our quarterly financial statements for the period ended June 30, 2013, we initiated an
analysis of the fair value of goodwill and determined that goodwill related to Rio Grande Management Company, L.L.C., a
wholly-owned subsidiary of the Company, was impaired. Based on this determination, we recorded a non-cash charge of
approximately $0.5 million in the Human Services segment during the year ended December 31, 2013 to reduce the carrying
value of the related goodwill to zero.
Non-operating expense
Interest expense, net. Interest expense, net charges were as follows (in thousands):
Year Ended December 31,
2013
2014
Dollar
change
$
14,600 $
6,894 $
7,706
Percent
change
111.8%
Our current and long-term debt obligations have increased to approximately $575.2 million at December 31, 2014, from
$123.5 million at December 31, 2013. The increase in our interest expense for 2014 as compared to 2013 primarily resulted
from the increase in outstanding debt, as well as approximately $4.5 million of financing fees that were deferred and fully
expensed in the fourth quarter of 2014 in relation to bridge financing commitments.
(Gain) on foreign currency. (Gain) on foreign currency of approximately $37,000 for 2014 resulted primarily from
translation adjustments on intercompany transactions with our foreign subsidiaries.
Loss on extinguishment of debt. Loss on extinguishment of debt of approximately $0.5 million for 2013 resulted from
the write-off of deferred financing fees related to our credit facility that was repaid in full in August 2013 with proceeds from
our amended and restated credit facility. As current and previous credit facilities were loan syndications, and a number of
lenders participated in both credit facilities, the Company evaluated the accounting for financing fees on a lender by lender
basis and recorded a charge accordingly.
46
Provision for income taxes
Our effective tax rate for 2014 and 2013 was 27.0% and 37.7% respectively. Our effective tax rate was lower than the
US federal statutory rate of 35.0% for 2014 due primarily to the impact of the non-taxable nature of a favorable contingent
consideration adjustment related to the Ingeus acquisition. Our effective tax rate was higher than the US federal statutory rate
for 2013 due primarily to state taxes as well as various non-deductible expenses.
Adjusted EBITDA
After adjusting for the items noted in the table below, Adjusted EBITDA was $84.0 million for 2014 as compared to
$55.3 million for 2013.
EBITDA and Adjusted EBITDA are non-GAAP measurements. We utilize these non-GAAP measurements as a means
to measure overall operating performance and to better compare current operating results with other companies within our
industry. Details of the excluded items and a reconciliation of the non-GAAP financial measures to the most comparable
GAAP financial measure are presented in the table below. The non-GAAP measures do not replace the presentation of our
GAAP financial results. We have provided this supplemental non-GAAP information because we believe it provides
meaningful comparisons of the results of our operations for the periods presented. The non-GAAP measures are not in
accordance with, or an alternative for, GAAP and may be different from non-GAAP measures used by some other companies.
(in thousands)
Year ended December 31,
2013
2014
Net income ....................................................................................................... $
20,275 $
Interest expense, net ..........................................................................................
Provision for income taxes ................................................................................
Depreciation and amortization ..........................................................................
14,600
7,502
29,488
EBITDA ...........................................................................................................
71,865
Acquisition costs ...............................................................................................
Integration and restructuring charges ................................................................
General and administrative financing costs .......................................................
Ingeus acquisition related equity compensation ................................................
(Gain) on foreign currency translation ..............................................................
Contingent consideration adjustments ...............................................................
Asset impairment charge (a) .............................................................................
Payments related to retirement of executive officers, net (b) ............................
Loss on extinguishment of debt (c) ...................................................................
11,838
2,785
2,971
3,426
(37)
(16,314)
6,915
511
-
19,438
6,894
11,777
14,872
52,981
-
-
-
-
-
-
492
1,277
525
Adjusted EBITDA ........................................................................................... $
83,960 $
55,275
a)
Impairment charges taken in 2014 and 2013 related to three Human Services reporting units in 2014 and one Human
Services reporting unit in 2013.
b) Represents payments related to the retirement or termination of certain executives and a key employee, net of benefit of
forfeiture of stock based compensation upon their departure.
c) Represents a loss on extinguishment of debt resulting from the write-off of deferred financing fees related to our credit
facility that was refinanced in full in August 2013.
47
Year ended December 31, 2013 compared to year ended December 31, 2012
Revenues
Service revenue is comprised of the following (in thousands):
Non-emergency transportation services ................................ $
Human services .....................................................................
2013
770,246 $
352,436
2012
750,658 $
355,231
Year Ended December 31,
Dollar
change
Percent
change
19,588
(2,795)
2.6%
-0.8%
1.5%
Total Services revenue ....................................................... $ 1,122,682 $ 1,105,889 $
16,793
Non-emergency transportation services. Non-emergency transportation services revenues were as follows
(in thousands):
Year Ended December 31,
2012
2013
Dollar
change
Percent
change
$
770,246 $
750,658 $
19,588
2.6%
NET Services revenues were favorably impacted in 2013 by:
●
●
●
●
●
●
●
full year results from the expansion of two additional regions in South Carolina in February 2012;
full year results from the expansion of two additional regions in Georgia in April and July 2012;
full year results from the addition of our Dallas, Texas Medicaid contract in April 2012;
the multi-phased implementation of the New York City administrative services contract which began in
May 2012 and was completed in the first quarter of 2013;
implementation of various MCO contracts in Louisiana, Hawaii and Kansas;
continued expansion of our California ambulance commercial and managed care lines of business; and
rate adjustments matching historical utilization in a number of our contracts, as well as new rates for several
renewed and awarded contracts.
These factors noted above were partially offset by a decrease in revenue resulting from the elimination and transition
of the Connecticut “at-risk” contract to a new “administrative services only” contract implemented in February 2013, as well
as the elimination of both the State and Southeast Region Medicaid contracts in Wisconsin, and the contract in Arkansas.
Human services. Human services revenues are comprised of the following (in thousands):
Home and community based services ................................... $
Foster care services ...............................................................
Management fees ..................................................................
2013
305,616 $
38,490
8,330
2012
309,300 $
33,534
12,397
Year Ended December 31,
Dollar
change
Percent
change
(3,684)
4,956
(4,067)
-1.2%
14.8%
-32.8%
Total human services revenues .......................................... $
352,436 $
355,231 $
(2,795)
-0.8%
Home and community based services. Contract terminations in Florida and Canada, as well as the impact of waivers
granted under the NCLB, led to a decrease in home and community based services revenues for 2013 as compared to 2012.
Decreases in revenue also occurred due to reforms in managed care and a decrease in services provided in certain regions
due to other contract losses and inclement weather. The decrease in revenue was partially offset by revenues derived from
our new workforce development program in Wisconsin that began during 2013, as well as the impact of rate increases in
certain programs during 2013 and the implementation of other new programs in various markets.
Foster care services. Our foster care services revenues increased in 2013 from 2012 primarily as a result of expanding
services into rural areas in Tennessee and a new contract in Texas.
Management fees. The termination of, and changes to, certain management service agreements resulted in decreased
management fees in 2013 as compared to 2012.
48
Operating expenses
Service Expense.
Service expense is comprised of the following (in thousands):
Cost of non-emergency transportation services .................... $
Human service expense .........................................................
2013
710,428 $
309,623
2012
706,692 $
304,084
Year Ended December 31,
Dollar
change
Percent
change
3,736
5,539
0.5%
1.8%
0.9%
Total Service expense ........................................................ $ 1,020,051 $ 1,010,776 $
9,275
Cost of non-emergency transportation services. Non-emergency transportation services expenses included the
following for 2013 and 2012 (in thousands):
Year Ended December 31,
2013
2012
Dollar
change
Percent
change
Payroll and related costs ........................................................ $
Purchased services ................................................................
Other operating expenses ......................................................
Stock-based compensation ....................................................
Total cost of non-emergency transportation services ........ $
92,549 $
591,538
25,261
1,080
710,428 $
79,048 $
600,494
25,713
1,437
706,692 $
13,501
(8,956)
(452)
(357)
3,736
17.1%
-1.5%
-1.8%
-24.8%
0.5%
Payroll and related costs. The increase in payroll and related costs of our NET Services segment for 2013 as compared
to 2012 was due to additional staff hired for new contracts and contract expansions in Georgia, Texas, South Carolina and
New York, along with additional staffing needed for expansion of the California ambulance commercial and managed care
lines of business. Payroll and related costs, as a percentage of NET Services revenue, increased to 12.0% for 2013 from
10.5% for 2012, as we have added additional call center staff to ensure our compliance with the more demanding service
authorization process and intake response time requirements of some of our new contracts, as well as transitioning the
Connecticut contract and various New York managed care contracts from full risk contracts to administrative services only
contracts. All of these activities resulted in higher payroll and related costs as a percentage of consolidated revenue.
Purchased services. We subcontract with third party transportation providers to provide non-emergency transportation
services to our clients. The termination of our Arkansas and Wisconsin contracts, and the transition to an administrative
services only contract in Connecticut, whereby we are only responsible for the authorization process, not the payment to
transportation providers, has led to a decrease in purchased services. However, this decrease was partially offset by additional
purchased service costs for our expanded business in Georgia, Texas, South Carolina and California for 2013 as compared
to 2012. As a percentage of NET Services revenue, purchased services decreased to approximately 76.8% for 2013, from
80.0% for 2012.
Other operating expenses. Other operating expenses decreased for 2013 as compared to 2012 due primarily to
efficiencies gained as we optimized most of our call center and management infrastructure, as well as a reduction in new
contract implementation costs. Other operating expenses as a percentage of NET Services revenues were 3.3% for 2013 and
3.4% for 2012.
Stock-based compensation. Stock-based compensation expense was approximately $1.1 million and $1.4 million for
2013 and 2012, respectively. This item was primarily comprised of the amortization of the fair value of stock options and
restricted stock awarded to employees of our NET Services segment under our 2006 Plan, as well as costs related to
performance restricted stock units granted to an executive officer and a key employee.
49
Client service expense. Client service expense included the following for the years ended December 31, 2013 and 2012
(in thousands):
Year Ended December 31,
Payroll and related costs ........................................................ $
Purchased services ................................................................
Other operating expenses ......................................................
Stock-based compensation ....................................................
Total client service expense ............................................... $
2013
229,452 $
27,748
51,792
631
309,623 $
2012
228,782 $
26,000
48,408
894
304,084 $
Dollar
change
Percent
change
670
1,748
3,384
(263)
5,539
0.3%
6.7%
7.0%
-29.4%
1.8%
Payroll and related costs. Our payroll and related costs increased in 2013 from 2012 primarily due to costs associated
with a workforce development contract in Wisconsin that began in 2013, a new foster care program in Texas, 2013 bonus
accruals and additional information technology staff added during 2013. These increases were partially offset by decreases
in payroll in Florida and Canada and in our nationwide tutoring business, primarily as the result of contract terminations and
the impact of waivers granted under the NCLB. Payroll and related costs as a percentage of revenue of our Human Services
segment were 65.1% for 2013 and 64.4% for 2012.
Purchased services. We incur a variety of other support service expenses in the normal course of our domestic business,
including foster parent payments, pharmacy payments and out-of-home placements. In addition, we subcontract with a
network of providers for a portion of the workforce development services we provide throughout British Columbia, Canada.
In 2013, we experienced an increase in foster parent payments of approximately $2.7 million, which corresponds to the
increase in foster care revenue. This increase in purchased services was partially offset by decreased costs resulting from
contract terminations in Canada of approximately $1.7 million as compared to 2012. Purchased services, as a percentage of
our Human Services segment revenues increased to 7.9% for 2013, up from 7.3% for 2012 due to the impact of foster parent
payments relative to the level of related revenue.
Other operating expenses. Other operating expenses increased by approximately $0.7 million for 2013 as compared to
2012 due to an increase in incurred but not reported automobile, general liability and workers’ compensation claims.
Additionally, other operating expenses increased by approximately $1.0 million for client related costs including client
mileage and transportation, primarily related to new program expenses. Program start-up costs for our new Texas contract
have also resulted in an increase in expense year over year. Other operating expenses, as a percentage of revenue of our
Human Services segment, increased to 14.7% for 2013 from 13.6% for 2012.
Stock-based compensation. Stock-based compensation expense was approximately $0.6 million and $0.9 million for
2013 and 2012, respectively. This item was primarily comprised of the amortization of the fair value of stock options and
restricted stock awarded to key employees under our 2006 Plan, as well as costs related to performance restricted stock units
granted to an executive officer.
General and administrative expense. General and administrative expenses were as follows (in thousands):
Year Ended December 31,
2012
2013
Dollar
change
$
48,633 $
53,383 $
(4,750)
Percent
change
-8.9%
The decrease in administrative expenses for 2013 as compared to 2012 was primarily a result of a net decrease in payroll
and related costs of approximately $3.6 million. This net decrease included decreased costs attributable to changes in
management service agreements and decreased severance costs, offset by an increase in accrued bonuses for 2013.
Additionally, charitable contribution expense declined by approximately $1.7 million as compared to 2012. These items were
partially offset by an increase in facilities costs of approximately $0.7 million related to our NET Services segment growth
and the opening of new operating locations. General and administrative expense, as a percentage of revenue, decreased to
4.3% in 2013 from 4.8% in 2012, primarily due to the decreases in general and administrative expenses discussed above, as
well as a total revenue increase of approximately 1.5% that did not significantly impact general and administrative expenses.
50
Depreciation and amortization. Depreciation and amortization were as follows (in thousands):
Year Ended December 31,
2012
2013
Dollar
change
$
14,872 $
15,023 $
(151)
Percent
change
-1.0%
As a percentage of revenues, depreciation and amortization was approximately 1.3% and 1.4% for 2013 and 2012,
respectively.
Asset impairment charge. Asset impairment charges were as follows (in thousands):
Year Ended December 31,
2012
2013
Dollar
change
$
492 $
2,506 $
(2,014)
Percent
change
-80.4%
During the second quarter of 2013, the not-for-profit entities managed by Rio, our wholly-owned subsidiary, were
notified of the termination of funding for certain of their services. We expected that, due to this change in funding, the not-
for-profit entities Rio serves will not be able to maintain the level of business they historically experienced, which was
expected to result in the decrease or elimination of services provided by Rio. Based on these factors, in connection with
preparing our quarterly financial statements for the period ended June 30, 2013, we initiated an analysis of the fair value of
goodwill and determined that goodwill related to Rio was impaired. Based on this determination, we recorded a non-cash
charge of approximately $0.5 million as of June 30, 2013 to reduce the carrying value of the related goodwill to zero.
During 2012, WCG experienced a decline in its business due to the impact of a reorganization of the service delivery
system in British Columbia. As part of this reorganization, all of the contracts for services in this market expired and new
contracts were put up for bid. Due to an increased level of competition in British Columbia and a decrease in the number of
services funded, WCG was unable to regain the level of business it experienced prior to the reorganization. The impact of
this system reorganization was not fully realized until the conclusion of the transition to the new system in the third quarter
of 2012 and contributed to a decrease in the financial results of operations of WCG for 2012. Due to these factors, we initiated
an analysis of the fair value of goodwill and other intangible assets, and determined that customer relationships of WCG
which comprise other intangible assets were impaired. Based on this determination, we recorded a non-cash charge of
approximately $2.5 million to reduce the carrying value of customer relationship intangible assets based on their estimated
fair values as of September 30, 2012.
Non-operating (income) expense
Interest expense, net. Our current and long-term debt obligations have decreased to approximately $123.5 million at
December 31, 2013, from $130.0 million at December 31, 2012. The decrease in our interest expense for 2013 as compared
to 2012 primarily resulted from the decrease in outstanding debt, as well as a decrease in the interest rate from LIBOR plus
2.25% - 3.00% to LIBOR plus 1.75% - 2.50% under our credit facility as a result of the refinancing of our long-term debt in
August 2013.
Loss on extinguishment of debt. Loss on extinguishment of debt of approximately $0.5 million for 2013 resulted from
the write-off of deferred financing fees related to our credit facility that was refinanced in full in August 2013 with proceeds
of our amended and restated credit facility. We accounted for the unamortized deferred financing fees related to the previous
credit facility under ASC 470-50 – Debt Modifications and Extinguishments. As current and previous credit facilities were
loan syndications, and a number of lenders participated in both credit facilities, the Company evaluated the accounting for
financing fees on a lender by lender basis and recorded a charge accordingly.
Provision for income taxes
Our effective tax rate for 2013 and 2012 was 37.7% and 49.2%, respectively. Our effective tax rate was higher than the
US federal statutory rate of 35.0% for 2013 and 2012 due primarily to state taxes as well as various non-deductible expenses.
The 2013 effective tax rate was favorably impacted primarily by disqualifying dispositions of incentive stock options. The
2012 rate was favorably impacted by the final determination of the tax benefits related to certain liabilities assumed as a
result of a 2011 acquisition, but was unfavorably impacted by lower projected income before income taxes, which was
primarily due to the $2.5 million intangible impairment charge recorded in the quarter ended September 30, 2012.
51
Adjusted EBITDA
After adjusting for the items noted in the table below, Adjusted EBITDA was $55.3 million for 2013 as compared to
$43.6 million for 2012.
EBITDA and Adjusted EBITDA are non-GAAP measurements. We utilize these non-GAAP measurements as a means
to measure overall operating performance and to better compare current operating results with other companies within our
industry. Details of the excluded items and a reconciliation of the non-GAAP financial measures to the most comparable
GAAP financial measure are presented in the table below. The non-GAAP measures do not replace the presentation of our
GAAP financial results. We have provided this supplemental non-GAAP information because we believe it provides
meaningful comparisons of the results of our operations for the periods presented. The non-GAAP measures are not in
accordance with, or an alternative for, GAAP and may be different from non-GAAP measures used by some other companies.
(in thousands)
Year ended December 31,
2012
2013
Net income .............................................................................................................. $
19,438 $
Interest expense, net .................................................................................................
Provision for income taxes .......................................................................................
Depreciation and amortization .................................................................................
6,894
11,777
14,872
EBITDA ..................................................................................................................
52,981
Asset impairment charge (a) ....................................................................................
Payments related to retirement of executive officers, net (b) ...................................
Strategic alternatives costs (c) ..................................................................................
Loss on extinguishment of debt (d) ..........................................................................
492
1,277
-
525
8,482
7,508
8,211
15,023
39,224
2,506
1,293
593
-
Adjusted EBITDA .................................................................................................. $
55,275 $
43,616
Impairment charges taken in 2013 related to Rio and in 2012 related to WCG.
a)
b) Represents payments related to the retirement or termination of certain executives and a key employee, net of benefit of
forfeiture of stock based compensation upon their departure.
c) Represents costs incurred related to our review of strategic alternatives arising from unsolicited proposals to take our
company private. We terminated this review in June 2012 upon determining that a continued focus on our operations
was the best alternative to maximize shareholder value.
d) Represents a loss on extinguishment of debt resulting from the write-off of deferred financing fees related to our credit
facility that was refinanced in full in August 2013.
Seasonality
Our quarterly operating results and operating cash flows normally fluctuate as a result of seasonal variations in our
business. Our NET Services operating segment experiences fluctuations in demand for its non-emergency transportation
services during the summer, winter and holiday seasons. Due to higher demand in the summer months and lower demand in
the winter and holiday seasons, coupled with a primarily fixed revenue stream based on a per member, per month payment
structure, our NET Services operating segment normally experiences lower operating margins in the summer season and
higher operating margins in the winter and holiday seasons.
In our Human Services operating segment, lower client demand for its home and community based services during the
holiday and summer seasons generally results in lower revenue during those periods. However, our operating expenses related
to the Human Services operating segment do not vary significantly with these changes. As a result, our Human Services
operating segment typically experiences lower operating margins during the holiday and summer seasons.
In our HA Services operating segment, CHAs are typically provided as part of MA plan’s annual program and are
conducted with an individual member once per year. Historically, there has been higher CHA volume in the second half of
the calendar year as a result of an accelerating demand towards year-end.
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Liquidity and capital resources
Short-term capital requirements consist primarily of recurring operating expenses and debt service requirements. We
expect to meet these requirements through available cash on hand, the generation of cash from our operating segments and
from our revolving credit facility.
Cash flow from financing activities was our primary source of cash in 2014. Our balance of cash and cash equivalents
was approximately $160.4 million and $99.0 million at December 31, 2014 and 2013, respectively. Approximately $42.7
million of cash was held in foreign countries at December 31, 2014, and is not available to fund domestic operations unless
the funds are repatriated. The repatriation of funds would be subject to certain taxes and fees that are prohibitive, and as such,
we do not currently intend to repatriate funds held internationally. We had restricted cash of approximately $18.6 million and
$15.7 million at December 31, 2014 and 2013, respectively, related to contractual obligations and activities of our captive
insurance subsidiaries and other subsidiaries. At December 31, 2014 and 2013, our total debt was approximately $575.2
million and $123.5 million, respectively.
We may access capital markets to raise equity financing for various business reasons, including required debt payments
and acquisitions. The timing, term, size, and pricing of any such financing will depend on investor interest and market
conditions, and there can be no assurance that we will be able to obtain any such financing. In addition, with respect to
required debt payments, our credit agreement requires us, subject to certain exceptions as set forth in the credit agreement,
to prepay the outstanding loans in an aggregate amount equal to 100% of the net cash proceeds received from certain asset
dispositions, debt issuances, insurance and casualty awards and other extraordinary receipts.
Year ended December 31, 2014
Cash flows
Operating activities. We generated net cash flows from operating activities of approximately $55.2 million for 2014.
These cash flows included net income of approximately $20.3 million, and net non-cash items including depreciation,
amortization, amortization of deferred financing costs and debt discount, provision for doubtful accounts, stock-based
compensation, deferred income taxes and other items of approximately $44.3 million. The balance of the cash provided by
operating activities is primarily due to the net effect of changes in other working capital items, including the following
significant items:
•
•
approximately $17.2 million due to the increase in accounts receivable primarily due to an increase in Human
Services’ accounts receivable of approximately $10.9 million and an increase in NET Services’ accounts
receivable of approximately $11.0 million; and
approximately $28.5 million due to the increase in accounts payable and accrued expenses primarily
attributable to the timing of payments related to non-emergency transportation contract reimbursements and
the accrual of contingent consideration liabilities.
Investing activities. Net cash used in investing activities totaled approximately $443.4 million for 2014. Approximately
$352.1 million of cash was paid in the acquisition of Matrix, approximately $55.1 million, net of cash acquired, was paid in
the acquisition of Ingeus and approximately $9.8 million of cash was paid for two human services businesses acquired through
asset purchase agreements in May and October, 2014. Additionally, approximately $23.2 million was used to purchase
property and equipment to support the growth of our operations.
Financing activities. Net cash provided by financing activities totaled approximately $453.1 million for 2014. Under
the Second Amendment to our credit facility, we borrowed $250.0 million under a term loan. Additionally, we borrowed
$185.7 million from our revolving credit facility, and borrowed $65.5 million on an unsecured subordinated bridge note due
to a related party. We also paid financing fees associated with the refinancing of our long-term debt of approximately $12.8
million. Cash provided by financing activities also included $11.0 million of cash received from employee stock option
exercises.
53
Year ended December 31, 2013
Cash flows
Operating activities. We generated net cash flows from operating activities of approximately $55.2 million for 2013.
These cash flows included net income of approximately $19.4 million, and net non-cash items including depreciation,
amortization, amortization of deferred financing costs, loss on extinguishment of debt, provision for doubtful accounts, stock-
based compensation, deferred income taxes, asset impairment charge and other items of approximately $19.1 million. The
balance of the cash provided by operating activities is primarily due to the net effect of changes in other working capital
items, including the following significant items:
•
•
approximately $18.9 million due to the increase in accounts payable and accrued expenses primarily
attributable to the timing of payments related to non-emergency transportation contract reimbursements; and
approximately $6.4 million related to the decrease in accrued purchased transportation primarily due to the
termination of the two Wisconsin NET Services contracts effective July 31, 2013 and the transition to an
administrative services only contract in Connecticut.
Investing activities. Net cash used in investing activities totaled approximately $13.8 million for 2013. Approximately
$10.2 million was used to purchase property and equipment to support the growth of our operations. Additionally,
approximately $2.8 million of this amount related to an increase in restricted cash, which was primarily due to the annual
insurance policy renewals and the opening of a trust account for our wholly-owned captive insurance subsidiary.
Financing activities. Net cash provided by financing activities totaled approximately $2.1 million for 2013. Under the
amended and restated credit facility we entered into in August 2013, we borrowed $60.0 million under a term loan and $16.0
million from our revolving credit facility, and repaid approximately $82.5 million of existing long-term debt. We also paid
financing fees associated with the refinancing of our long-term debt, of which approximately $0.3 million were expensed and
approximately $1.8 million were deferred and are being amortized over the life of the credit facility. Cash provided by
financing activities also included $11.2 million of cash received from employee stock option exercises and the related excess
tax benefits.
Obligations and commitments
Convertible senior subordinated notes. On November 13, 2007, we issued $70.0 million in principal amount of Senior
Notes, the proceeds of which were used to partially fund the cash portion of the purchase price paid by us to acquire Charter
LCI Corporation and its subsidiaries, referred to as LogistiCare.
We paid interest at a rate of 6.5% per annum on the Senior Notes in cash semiannually in arrears on May 15 and
November 15 of each year. The Senior Notes matured on May 15, 2014, and we repaid the balance of $47.5 million with
cash on hand.
Credit facility. On August 2, 2013, we entered into an Amended and Restated Credit Agreement with Bank of America,
N.A., as administrative agent, swing line lender and letter of credit issuer, SunTrust Bank, as syndication agent, Merrill
Lynch, Pierce, Fenner & Smith Incorporated and SunTrust Robinson Humphrey, Inc., as joint lead arrangers and joint book
managers and other lenders party thereto. The Amended and Restated Credit Agreement provided us with a senior secured
credit facility, or the Credit Facility, in aggregate principal amount of $225.0 million, comprised of a $60.0 million term loan
facility and a $165.0 million revolving credit facility. The Credit Facility includes sublimits for swingline loans and letters
of credit in amounts of up to $10.0 million and $25.0 million, respectively. On August 2, 2013, we borrowed the entire
amount available under the term loan facility and $16.0 million under our revolving credit facility and used the proceeds
thereof to refinance certain of our existing indebtedness.
Under the Credit Facility we have an option to request an increase in the amount of the revolving credit facility and/or
the term loan facility from time to time (on substantially the same terms as apply to the existing facilities) in an aggregate
amount of up to $75.0 million with either additional commitments from lenders under the Amended and Restated Credit
Agreement at such time or new commitments from financial institutions acceptable to the administrative agent in its
reasonable discretion, so long as no default or event of default exists at the time of any such increase. We may not be able to
access additional funds under this increase option as no lender is obligated to participate in any such increase under the Credit
Facility.
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The Credit Facility matures on August 2, 2018. We may prepay the Credit Facility in whole or in part, at any time
without premium or penalty, subject to reimbursement of the lenders’ breakage and redeployment costs in connection with
prepayments of London Interbank Offering Rate, or LIBOR, loans. The unutilized portion of the commitments under the
Credit Facility may be irrevocably reduced or terminated by us at any time without penalty.
Our obligations under the Credit Facility are guaranteed by all of our present and future domestic subsidiaries, excluding
certain domestic subsidiaries, which include our insurance captives and not-for-profit subsidiaries. Our obligations under,
and each guarantor’s obligations under its guaranty of, the Credit Facility are secured by a first priority lien on substantially
all of our respective assets, including a pledge of 100% of the issued and outstanding stock of our domestic subsidiaries and
65% of the issued and outstanding stock of our first tier foreign subsidiaries.
On May 28, 2014 we entered into the first amendment (the “First Amendment”) to our Credit Facility. The First
Amendment provided for, among other things, an increase in the aggregate amount of the revolving credit facility from
$165.0 million to $240.0 million and other modifications in connection with the consummation of the acquisition of Ingeus.
On October 23, 2014, we entered into the Second Amendment to the Amended and Restated Credit and Guaranty
Agreement and Consent (the “Second Amendment”) to amend the Credit Facility to (i) add a new term loan tranche in
aggregate principal amount of up to $250.0 million to partly finance the acquisition of Matrix, (ii) provide the consent of the
required lenders to consummate the acquisition of Matrix, (iii) permit incurrence of additional debt (including the Note,
described below) to fund the acquisition of Matrix, (iv) add an excess cash flow mandatory prepayment provision and (v)
such other amendments which are beneficial to us and provide greater flexibility for our future operations.
Interest on the outstanding principal amount of the loans accrues, at our election, at a per annum rate equal to LIBOR,
plus an applicable margin or the base rate plus an applicable margin. The applicable margin ranges from 2.25% to 3.25% in
the case of LIBOR loans and 1.25% to 2.25% in the case of the base rate loans, in each case, based on our consolidated
leverage ratio as defined in the Amended and Restated Credit Agreement. Interest on the loans is payable quarterly in arrears.
The interest rate applied to our term loan at December 31, 2014 was 3.16%. In addition, we are obligated to pay a quarterly
commitment fee based on a percentage of the unused portion of each lender’s commitment under the revolving credit facility
and quarterly letter of credit fees based on a percentage of the maximum amount available to be drawn under each outstanding
letter of credit. The commitment fee and letter of credit fee ranges from 0.25% to 0.50% and 2.25% to 3.25%, respectively,
in each case, based on our consolidated leverage ratio.
The $60.0 million term loan is subject to quarterly amortization payments, commencing on December 31, 2014, so that
the following percentages of the term loan outstanding on the closing date plus the principal amount of any term loans funded
pursuant to the increase option are repaid as follows: 7.5% between December 31, 2014 and September 30, 2015, 10.0%
between December 31, 2015 and September 30, 2016, 12.5% between December 31, 2016 and September 30, 2017, 11.25%
between December 31, 2017 and June 30, 2018 and the remaining balance at maturity.
The $250.0 million term loan is subject to quarterly amortization payments, commencing on March 31, 2015, so that
the following percentages of the term loan outstanding on the closing date plus the principal amount of any term loans funded
pursuant to the increase option are repaid as follows: 5.625% between March 31, 2015 and September 30, 2015, 10.0%
between December 31, 2015 and September 30, 2016, 12.5% between December 31, 2016 and September 30, 2017, 11.25%
between December 31, 2017 and June 30, 2018 and the remaining balance at maturity.
The Credit Facility also requires us (subject to certain exceptions as set forth in the Amended and Restated Credit
Agreement) to prepay the outstanding loans in an aggregate amount equal to 100% of the net cash proceeds received from
certain asset dispositions, debt issuances, insurance and casualty awards and other extraordinary receipts.
The Amended and Restated Credit Agreement contains customary affirmative and negative covenants and events of
default. The negative covenants include restrictions on our ability to, among other things, incur additional indebtedness,
create liens, make investments, give guarantees, pay dividends, sell assets and merge and consolidate. We are subject to
financial covenants, including consolidated net leverage and consolidated fixed charge covenants. We were in compliance
with all covenants as of December 31, 2014.
We had $201.7 million of borrowings outstanding under the revolving credit facility as of December 31, 2014. $25.0
million of the revolving credit facility is available to collateralize certain letters of credit. As of December 31, 2014, there
were seven letters of credit in the amount of approximately $8.0 million collateralized under the revolving credit facility. At
December 31, 2014, our available credit under the revolving credit facility was $30.3 million.
55
We incurred fees of approximately $12.7 million to refinance our long-term debt during 2014. We have accounted for
fees related to the refinancing of our long-term debt, as well as unamortized deferred financing fees related to the Senior
Credit Facility, under ASC 470-50 – Debt Modifications and Extinguishments. As both credit facilities were loan
syndications, and a number of lenders participated in both credit facilities, we evaluated the accounting for financing fees on
a lender by lender basis. Of the total amount of fees incurred for the refinancing of debt, approximately $5.2 million was
deferred as deferred financing fees or debt discount, and will be amortized over the life of the loans, approximately $4.5
million was deferred and fully expensed in the fourth quarter of 2014 in relation to bridge financing commitments and
approximately $3.0 million was immediately expensed in 2014.
Unsecured subordinated bridge note. On October 23, 2014, we issued to Coliseum Capital Management, LLC and
certain of its affiliates (“Coliseum”), a related party, a 14.0% Unsecured Subordinated Note in aggregate principal amount of
$65.5 million (the “Note”). Interest from the issuance date to, but excluding, the 120th day after the issuance date, was paid
in cash in the amount of $3.0 million on the issuance of the Note. Coliseum held approximately 15% of our outstanding
common stock as of October 23, 2014 and is our largest shareholder. Additionally, Christopher Shackelton, who serves as
our Chairman of the board of directors, is also a Managing Partner at Coliseum Capital Management, LLC.
The Note was repaid in full on February 11, 2015, with the proceeds from a registered Rights Offering (“Rights
Offering”) and related standby purchase commitment described below, which allowed all of the Company’s existing common
stock holders the non-transferrable right to purchase their pro rata share of $65.5 million of convertible preferred stock at a
price of $100.00 per share, as further described below. As such, the Note was classified as a current liability at December 31,
2014.
Rights offering. We completed a Rights Offering, on February 5, 2015, allowing all of the Company’s existing common
stock holders the non-transferrable right to purchase their pro rata share of $65.5 million of convertible preferred stock at a
price equal to $100.00 per share. The convertible preferred stock is convertible into shares of our common stock at a
conversion price equal to $39.88, which was the closing price of our common stock on the NASDAQ Global Select Market
on October 22, 2014.
Stockholders exercised subscription rights to purchase 130,884 shares of the Company's convertible preferred stock.
Pursuant to the terms and conditions of the Standby Purchase Agreement between Coliseum Capital Partners, L.P., Coliseum
Capital Partners II, L.P., Coliseum Capital Co-Invest, L.P. and Blackwell Partners, LLC (collectively, the "Standby
Purchasers") and the Company, the remaining 524,116 shares the Company's preferred stock was purchased by Standby
Purchasers at the $100.00 per share subscription price. The Standby Purchasers beneficially own approximately 94% of our
outstanding convertible preferred stock after giving effect to the Rights Offering and the Standby Purchase Agreement. The
Company received $65.5 million in aggregate gross proceeds from the consummation of the Rights Offering and Standby
Purchase Agreement, which it used to repay the related party unsecured subordinated bridge note discussed above.
Additionally, on March 12, 2015, the Standby Purchasers exercised their right to purchase an additional 150,000 shares
of the Company’s convertible preferred stock.
We may pay a noncumulative cash dividend on each share of convertible preferred stock, when, as and if declared by
our board of directors, at the rate of five and one-half percent (5.5%) per annum on the liquidation preference then in effect.
Following the issue date of the convertible preferred stock, on or before the third business day immediately preceding each
fiscal quarter, we will determine our intention whether or not to pay a cash dividend with respect to that ensuing quarter and
will give notice of our intention to each holder of convertible preferred stock as soon as practicable thereafter.
In the event we do not declare and pay a cash dividend, the liquidation preference will be increased to an amount equal
to the liquidation preference in effect at the start of the applicable dividend period, plus an amount equal to such then
applicable liquidation preference multiplied by eight and one-half percent (8.5%) per annum, computed on the basis of a 365-
day year and the actual number of days elapsed from the start of the applicable dividend period to the applicable date of
determination.
Cash dividends will be payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year,
commencing on the first calendar day of the first January, April, July or October following the date of original issuance of
the convertible preferred stock, and, if declared, will begin to accrue on the first day of the applicable dividend period. Paid
in kind (“PIK”) dividends, if applicable, will accrue and be cumulative on the same schedule as set forth above for cash
dividends and will also be compounded at the applicable annual rate on each applicable subsequent dividend date. PIK
dividends are paid upon the occurrence of a liquidation event, conversion or redemption in accordance with the terms of the
convertible preferred stock.
56
Contingent obligations. Under The Providence Service Corporation Deferred Compensation Plan, as amended, or
Deferred Compensation Plan, eligible employees and independent contractors of a participating employer (as defined in the
Deferred Compensation Plan) may defer all or a portion of their base salary, service bonus, performance-based compensation
earned in a period of 12 months or more, commissions and, in the case of independent contractors, compensation reportable
on Form 1099. The Deferred Compensation Plan is unfunded and benefits are paid from our general assets. We also maintain
a 409(A) Deferred Compensation Rabbi Trust Plan for highly compensated employees of our NET Services operating
segment. Benefits are paid from our general assets under this plan.
Reinsurance and Self-Funded Insurance Programs
Reinsurance
We reinsure a substantial portion of our NET Services’ and Human Services’ automobile, general and professional
liability and workers’ compensation costs under reinsurance programs through Social Services Providers Captive Insurance
Company (“SPCIC”), a wholly owned subsidiary of the Company. Historically, we also provided reinsurance for policies
written by a third party insurer for general liability, automobile liability, and automobile physical damage coverage to certain
members of the network of subcontracted transportation providers and independent third parties under our NET Services
operating segment through Provado. While Provado did not renew its insurance agreement in February 2011 and no longer
assumes liabilities for new policies, it will continue to administer existing policies for the foreseeable future and resolve
remaining and future claims related to those policies. Provado is a licensed captive insurance company domiciled in the State
of South Carolina. The decision to reinsure our risks and provide a self-funded health insurance program to our employees
was made based on current conditions in the insurance marketplace that have led to increasingly higher levels of self-
insurance retentions, increasing number of coverage limitations, and fluctuating insurance premium rates.
SPCIC:
SPCIC, which is a licensed captive insurance company domiciled in the State of Arizona, reinsures third-party insurers
for general and professional liability exposures for the first dollar of each and every loss up to $1.0 million per loss and $5.0
million in the aggregate. At December 31, 2014, the cumulative reserve for expected losses since inception in 2005 of this
reinsurance program was approximately $2.8 million. The excess premium over our expected losses may be used to fund
SPCIC’s operating expenses, fund any deficit arising in automobile and workers’ compensation liability coverage, provide
for surplus reserves, and fund any other risk management activities.
SPCIC reinsures a third-party insurer for worker’s compensation insurance for the first dollar of each and every loss up
to $0.5 million per occurrence with a $13.7 million annual policy aggregate limit. The cumulative reserve for expected losses
since inception in 2005 of this reinsurance program at December 31, 2014 was approximately $9.1 million.
SPCIC also reinsures a third-party insurer for automobile liability exposures for approximately $250 thousand per
claim. The cumulative reserve for expected losses since inception in 2013 of this reinsurance program at December 31, 2014
was approximately $0.9 million.
Based on an independent actuarial report, our expected losses related to workers’ compensation, automobile and general
and professional liability in excess of our liability under our associated reinsurance programs at December 31, 2014 was
approximately $5.5 million. We recorded a corresponding receivable from third-party insurers and liability at December 31,
2014 for these expected losses, which would be paid by third-party insurers to the extent losses are incurred. We have an
umbrella liability insurance policy providing additional coverage in the amount of $25.0 million in the aggregate in excess
of the policy limits of the general and professional liability insurance policy and automobile liability insurance policy.
SPCIC had restricted cash of approximately $17.5 million and $13.9 million at December 31, 2014 and 2013,
respectively, which was restricted to secure the reinsured claims losses of SPCIC under the automobile, general and
professional liability and workers’ compensation reinsurance programs. The full extent of claims may not be fully determined
for years. Therefore, the estimates of potential obligations are based on recommendations of an independent actuary using
historical data, industry data, and our claims experience.
Provado:
Under a reinsurance agreement with a third party insurer, Provado reinsures the third party insurer for the first $250
thousand of each loss for each line of coverage, subject to an annual aggregate equal to 107.7% of gross written premium,
and certain claims in excess of $250 thousand to an additional aggregate limit of $1.1 million. The cumulative reserve for
expected losses of this reinsurance program at December 31, 2014 was approximately $1.4 million. As noted above, effective
57
February 15, 2011, Provado did not renew its reinsurance agreement and will not assume liabilities for policies after that
date. It will continue to administer existing policies for the foreseeable future and resolve remaining and future claims related
to these policies.
The liabilities for expected losses and loss adjustment expenses are based primarily on individual case estimates for
losses reported by claimants. An estimate is provided for losses and loss adjustment expenses incurred but not reported on
the basis of our claims experience and claims experience of the industry. These estimates are reviewed at least annually by
independent consulting actuaries. As experience develops and new information becomes known, the estimates are adjusted.
Providence Liability Insurance Coverages
The decision to reinsure our risks and provide a self-funded health insurance program to our employees was made based
on current conditions in the insurance marketplace that have led to increasingly higher levels of self-insurance retentions,
increasing number of coverage limitations, and fluctuating insurance premium rates. Certain changes are made periodically
to our insurance coverage which we believe balances our costs and risks in an appropriate manner. While we are insured for
the types of claims discussed above, damages exceeding our insurance limits or outside our insurance coverage, such as a
claim for fraud or punitive damages, could adversely affect our cash flow and financial condition.
Health Insurance
We offer our NET Services’ and Human Services’ employees an option to participate in a self-funded health insurance
program. As of December 31, 2014, health claims were self-funded with a stop-loss umbrella policy with a third party insurer
to limit the maximum potential liability for individual claims to $275 thousand per person and for a maximum potential claim
liability based on member enrollment.
Health insurance claims are paid as they are submitted to the plan administrator. We maintain accruals for claims that
have been incurred but not yet reported to the plan administrator, and therefore, have not been paid. The incurred but not
reported reserve is based on an established cap and current payment trends of health insurance claims. The liability for the
self-funded health plan of approximately $2.0 million and $1.9 million as of December 31, 2014 and 2013, respectively, was
recorded in “Reinsurance liability reserve” in our consolidated balance sheets.
We charge our employees a portion of the costs of our self-funded group health insurance programs. We determine this
charge at the beginning of each plan year based upon historical and projected medical utilization data. Any difference between
our projections and our actual experience is borne by us. We estimate potential obligations for liabilities under this program
to reserve what we believe to be a sufficient amount to cover liabilities based on our past experience. Any significant increase
in the number of claims or costs associated with claims made under this program above what we reserve could have a material
adverse effect on our financial results.
Contractual cash obligations.
The following is a summary of our future contractual cash obligations as of December 31, 2014:
Contractual cash obligations (000's)
Debt ...................................................................... $
Interest (1) ............................................................
Purchased services commitments .........................
Operating Leases ..................................................
Total ..................................................................... $
Total
576,675 $
55,317
82
84,564
716,638 $
Less than
1 Year
At December 31, 2014
1-3
Years
Years
3-5
After 5
Years
90,688 $
16,480
74
28,628
135,870 $
74,225 $
30,007
8
35,407
139,647 $
411,762 $
8,830
-
13,016
433,608 $
-
-
-
7,513
7,513
(1) Future interest payments have been calculated at the current rates as of December 31, 2014.
Stock repurchase program
In 2012, we spent approximately $3.5 million to repurchase 293,600 shares of our common stock in the open market
under a stock repurchase program approved by our board of directors on February 1, 2007. Under this stock repurchase
program we may repurchase up to one million shares of our common stock from time to time on the open market or in
58
privately negotiated transactions, depending on market conditions and our capital requirements. Since inception, we have
spent approximately $14.4 million to purchase 756,100 shares of our common stock on the open market. We did not purchase
shares of our common stock during the period 2008 through 2011 or during 2013 and 2014 under this plan.
Off-balance sheet arrangements
As of December 31, 2014 and 2013, we did not have any relationships with unconsolidated entities or financial
partnerships, such as entities referred to as structured finance or special purpose entities, which would have been established
for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
New Accounting Pronouncements
In April 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial
Statements (Topic 2015) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and
Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). ASU 2014-08 changes the requirements for reporting
discontinued operations. Under the ASU discontinued operations is defined as either a:
●
Component of an entity, or group of components that
o
o
has been disposed of, meets the criteria to be classified as held-for-sale, or has been
abandoned/spun-off; and
represents a strategic shift that has (or will have a major effect on an entity’s operations
and financial results), or
●
Business or nonprofit activity that, on acquisition, meets the criteria to be classified as held-for-sale.
This ASU is effective for publicly held companies prospectively for all disposals (or classifications as held for sale) of
components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods
within those years, and all businesses that, on acquisition, are classified as held for sale that occur within annual periods
beginning on or after December 15, 2014, and interim periods within those years. We will prospectively apply this accounting
literature in 2015. We do not believe the adoption of ASU 2014-08 will have a material impact on our consolidated financial
statements.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606 (“ASU 2014-
09”). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-
specific guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of
promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:
● Step 1: Identify the contract(s) with a customer.
● Step 2: Identify the performance obligations in the contract.
● Step 3: Determine the transaction price.
● Step 4: Allocate the transaction price to the performance obligations in the contract.
● Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
For a publicly held entity, this ASU is effective for annual reporting periods beginning after December 15, 2016,
including interim periods within that reporting period. Early application is not permitted. We are currently evaluating the
impact ASU 2014-09 will have on our consolidated financial statements.
Forward-Looking Statements
Certain statements contained in this report on Form 10-K, such as any statements about our confidence or strategies or
our expectations about revenues, liabilities, results of operations, cash flows, ability to fund operations, profitability, ability
to meet financial covenants, contracts or market opportunities, constitute forward-looking statements within the meaning of
section 27A of the Securities Act of 1933 and section 21E of the Securities Exchange Act of 1934. These forward-looking
59
statements are based on our current expectations, assumptions, estimates and projections about our business and our industry.
You can identify forward-looking statements by the use of words such as “may,” “should,” “will,” “could,” “estimates,”
“predicts,” “potential,” “continue,” “anticipates,” “believes,” “plans,” “expects,” “future,” and “intends” and similar
expressions which are intended to identify forward-looking statements.
The forward-looking statements contained herein are not guarantees of our future performance and are subject to a
number of known and unknown risks, uncertainties and other factors, some of which are beyond our control and difficult to
predict and could cause our actual results or achievements to differ materially from those expressed, implied or forecasted in
the forward-looking statements. These risks and uncertainties include, but are not limited to the risks described under Part I
Item 1A of this report.
All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety
by the cautionary statements contained above and throughout this report. You are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date the statement was made. We do not intend to update
publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Foreign currency risk
As of December 31, 2014, we conducted business in 11 countries outside the US. As such, our cash flows and earnings
are subject to fluctuations from changes in foreign currency exchange rates. We do not currently hedge against the possible
impact of currency fluctuations. For 2014, we used 11 functional currencies and generated approximately $190.5 million of
our net operating revenues from operations outside the US. As we expand further into international markets, we expect the
risk from foreign currency exchange rates to increase.
A 10% adverse change in the foreign currency exchange rate from Great British Pounds to US Dollars would have a
$13.9 million impact on revenue, but would not significantly impact net income. A 10% adverse change in other foreign
currency exchange rates would not have a significant impact on the Company.
Interest rate and market risk
As of December 31, 2014, we had borrowings under our term loans of $308.9 million and borrowings under our
revolving line of credit of $201.7 million. Borrowings under the Credit Agreement accrued interest at LIBOR plus 3.00% per
annum as of December 31, 2014. An increase of 1% in the LIBOR rate would cause an increase in interest expense of up to
$17.0 million over the remaining term of the Amended and Restated Credit Agreement, which expires in 2018.
We assess the significance of interest rate market risk on a periodic basis and may implement strategies to manage such
risk as we deem appropriate.
60
Item 8. Financial Statements and Supplementary Data.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Management’s Report on Internal Control Over Financial Reporting .............................................................................. 62
Reports of Independent Registered Public Accounting Firm ............................................................................................ 64
Consolidated Balance Sheets at December 31, 2014 and 2013 ......................................................................................... 66
For the years ended December 31, 2014, 2013 and 2012:
Consolidated Statements of Income .................................................................................................................................. 67
Consolidated Statements of Comprehensive Income ........................................................................................................ 68
Consolidated Statements of Stockholders’ Equity ........................................................................................................... 69
Consolidated Statements of Cash Flows ........................................................................................................................... 70
Notes to Consolidated Financial Statements ..................................................................................................................... 72
61
Management’s Report on Internal Control Over Financial Reporting
Our management has the responsibility for establishing and maintaining adequate internal control over financial
reporting for the registrant, as such term is defined in the Securities Exchange Act of 1934 Rule 13a-15(f). Under the
supervision and with the participation of our principal executive officer and principal financial officer, we conducted an
assessment, as of December 31, 2014, of the effectiveness of our internal control over financial reporting based on the criteria
set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control–Integrated
Framework (1992).
We designed our internal control over financial reporting to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. Our internal control over financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the
assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of management and directors of the company; and
(3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of
the company’s assets that could have a material effect on the financial statements.
All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems
determined to be effective can provide only reasonable assurance with respect to financial statement preparation and
presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
We completed the following acquisitions in 2014, which we excluded from the evaluation of the effectiveness of our
internal control over financial reporting.
Acquired entity
Date of acquisition
Ingeus Limited ...............................................................................................................................
May 30, 2014
CCHN Group Holdings, Inc. .........................................................................................................
October 23, 2014
The following table highlights the significance of the acquisitions completed in 2014 to our consolidated financial
statements at December 31, 2014 (in thousands):
Period from date of
acquisition to
December 31, 2014
Assets
Revenue
Ingeus Limited ...................................................................................... $
CCHN Group Holdings, Inc. .................................................................
84,089 $
53,204
179,307
43,331
Total of all acquisitions completed in 2014 excluded from the
evaluation of the effectiveness of internal control over financial
reporting ................................................................................................ $
The Providence Service Corporation (“PRSC”) .................................... $
Percentage of PRSC ..............................................................................
137,293 $
1,165,245 $
11.8%
222,638
1,481,171
15.0%
We are currently integrating these acquisitions into our internal control over financial reporting processes. In executing
this integration, we are analyzing, evaluating and, where necessary, making changes in controls and procedures related to
these acquisitions, which we expect to be completed in fiscal year 2015. We have excluded these acquisitions from our
assessment of internal control over financial reporting as of December 31, 2014, as permitted by guidance provided by the
staff of the SEC. Other than the changes described above, there were no changes in our internal control over financial
reporting during the fiscal quarter ending December 31, 2014 that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
62
Based on our assessment, we concluded our internal control over financial reporting is effective as of December 31,
2014.
KPMG LLP, an independent registered public accounting firm, which audited our consolidated financial statements
included in this report on Form 10-K has issued an audit report on the effectiveness of our internal control over financial
reporting. KPMG LLP’s audit report is also included in this report on Form 10-K.
63
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
The Providence Service Corporation:
We have audited The Providence Service Corporation’s (the Company) internal control over financial reporting as of
December 31, 2014, based on criteria established in Internal Control – Integrated Framework (1992) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible
for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial
Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on
our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a
reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and
dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or
disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, The Providence Service Corporation maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2014, based on criteria established in Internal Control – Integrated Framework (1992)
issued by COSO.
The Company acquired Ingeus Limited and subsidiaries (Ingeus) and CCHN Group Holdings, Inc. and subsidiaries (Matrix)
during 2014 and management excluded from its assessment of the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2014, Ingeus’ internal control over financial reporting associated with total assets of
$84.1 million and total revenues of $179.3 million and Matrix’s internal control over financial reporting associated with total
assets of $53.2 million and total revenues of $43.3 million included in the consolidated financial statements of The Providence
Service Corporation and subsidiaries as of and for the year ended December 31, 2014. Our audit of internal control over
financial reporting of The Providence Service Corporation also excluded an evaluation of the internal control over financial
reporting of Ingeus and Matrix.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the consolidated balance sheets of The Providence Service Corporation and subsidiaries as of December 31, 2014 and 2013,
and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of
the years in the three-year period ended December 31, 2014, and the related financial statement schedule, and our report dated
March 16, 2015 expressed an unqualified opinion on those consolidated financial statements.
Phoenix, Arizona
March 16, 2015
/s/ KPMG LLP
64
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
The Providence Service Corporation:
We have audited the accompanying consolidated balance sheets of The Providence Service Corporation and subsidiaries (the
Company) as of December 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income,
stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2014. In connection
with our audits of the consolidated financial statements, we also have audited the financial statement schedule in Item
15(a)(2). These consolidated financial statements and the financial statement schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement
schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial
position of The Providence Service Corporation and subsidiaries as of December 31, 2014 and 2013, and the results of their
operations and their cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with
U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered
in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States),
the Company’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal
Control – Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO), and our report dated March 16, 2015 expressed an unqualified opinion on the effectiveness of the Company’s
internal control over financial reporting.
Phoenix, Arizona
March 16, 2015
/s/ KPMG LLP
65
The Providence Service Corporation
Consolidated Balance Sheets
(in thousands except share and per share data)
Assets
Current assets:
Cash and cash equivalents ......................................................................................... $
Accounts receivable, net of allowance of $6,034 in 2014 and $4,218 in 2013 .........
Other receivables .......................................................................................................
Prepaid expenses and other .......................................................................................
Restricted cash ..........................................................................................................
Deferred tax assets ....................................................................................................
Total current assets ...........................................................................................................
Property and equipment, net .............................................................................................
Goodwill ...........................................................................................................................
Intangible assets, net ........................................................................................................
Other assets ......................................................................................................................
Restricted cash, less current portion .................................................................................
Total assets ....................................................................................................................... $
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term obligations .................................................................. $
Note payable to related party ....................................................................................
Accounts payable ......................................................................................................
Accrued expenses ......................................................................................................
Accrued transportation costs .....................................................................................
Deferred revenue .......................................................................................................
Reinsurance liability reserve .....................................................................................
Total current liabilities .....................................................................................................
Long-term obligations, less current portion .....................................................................
Other long-term liabilities ................................................................................................
Deferred tax liabilities ......................................................................................................
Total liabilities .................................................................................................................
Commitments and contingencies (Notes 13 and 16)
Stockholders' equity
Preferred stock: Authorized 10,000,000 shares; $0.001 par value; none issued and
December 31,
2014
2013
160,406 $
151,344
6,866
46,157
3,807
6,066
374,646
57,148
355,641
340,673
22,373
14,764
1,165,245 $
25,188 $
65,500
48,061
121,857
55,492
12,245
11,115
339,458
484,525
26,609
93,239
943,831
98,995
88,315
6,607
11,831
3,772
2,152
211,672
32,709
113,263
43,476
11,681
11,957
424,758
48,250
-
3,904
52,484
54,962
3,687
10,778
174,065
75,250
15,359
9,447
274,121
outstanding ...........................................................................................................
-
-
Common stock: authorized 40,000,000 shares; $0.001 par value; 16,870,285 and
14,477,312 issued and outstanding (including treasury shares) ...........................
Additional paid-in capital ..........................................................................................
Accumulated deficit ..................................................................................................
Accumulated other comprehensive loss, net of tax ...................................................
Treasury shares, at cost, 1,014,108 and 956,442 shares ............................................
Total Providence stockholders' equity ..........................................................................
Non-controlling interest ............................................................................................
Total stockholders' equity ...............................................................................................
Total liabilities and stockholders' equity .......................................................................... $
17
261,155
(13,366 )
(8,756 )
(17,686 )
221,364
50
221,414
1,165,245 $
14
194,363
(33,641)
(1,419)
(15,641)
143,676
6,961
150,637
424,758
See accompanying notes to the consolidated financial statements
66
The Providence Service Corporation
Consolidated Statements of Income
(in thousands except share and per share data)
Year ended December 31,
2013
2014
2012
Service revenue .................................................................................. $
1,481,171 $
1,122,682 $
1,105,889
Operating expenses:
Service expense ..............................................................................
General and administrative expense ...............................................
Depreciation and amortization ........................................................
Asset impairment charge ................................................................
Total operating expenses ....................................................................
Operating income ..............................................................................
1,338,793
63,635
29,488
6,915
1,438,831
42,340
1,020,051
48,633
14,872
492
1,084,048
38,634
1,010,776
53,383
15,023
2,506
1,081,688
24,201
Other expense:
Interest expense, net .......................................................................
Loss on extinguishment of debt ......................................................
Gain on foreign currency translation ..............................................
Income before income taxes ...............................................................
Provision for income taxes .................................................................
Net income ........................................................................................ $
14,600
-
(37)
27,777
7,502
20,275 $
6,894
525
-
31,215
11,777
19,438 $
7,508
-
-
16,693
8,211
8,482
Earnings per common share:
Basic ............................................................................................... $
Diluted ............................................................................................ $
1.37 $
1.35 $
1.44 $
1.41 $
0.64
0.64
Weighted-average number of common shares outstanding:
Basic ...............................................................................................
Diluted ............................................................................................
14,765,303
15,018,561
13,499,885
13,809,874
13,225,448
13,354,613
See accompanying notes to the consolidated financial statements
67
The Providence Service Corporation
Consolidated Statements of Comprehensive Income
(in thousands)
Year ended December 31,
2013
2014
2012
Net income ......................................................................................... $
Other comprehensive income (loss):
Foreign currency translation adjustments, net of tax ......................
Other comprehensive income (loss) ...................................................
Comprehensive income ...................................................................... $
20,275 $
19,438 $
(7,337)
(7,337)
12,938 $
(526 )
(526 )
18,912 $
8,482
235
235
8,717
See accompanying notes to the consolidated financial statements
68
The Providence Service Corporation
Consolidated Statements of Stockholders' Equity
(in thousands except share data)
Common Stock
Additional
Paid-In
Amount Capital
Shares
Accumulated
Other
Comprehensive
Income
(Loss)
Treasury
Stock
Shares
Accumulated
Deficit
Non-
Controlling
Amount
Interest
Total
13,621,951
14
176,172
(61,561)
(1,128)
623,576
(11,435)
6,961 109,023
-
-
-
3,873
-
-
-
-
-
-
-
-
-
11,302
293,600
-
(169)
(3,490)
13,785,947
14
180,778
(53,079)
(893)
928,478
(15,094)
6,961 118,687
-
-
3,079
-
-
-
3,079
-
8,482
235
-
-
-
-
-
-
-
-
-
-
-
-
27,964
-
(547)
-
-
-
19,438
(526)
-
-
-
-
-
14,477,312
14
194,363
(33,641)
(1,419)
956,442
(15,641)
6,961 150,637
-
-
-
733
(169)
(3,490)
-
-
235
8,482
- 10,506
(547)
-
-
(526)
- 19,438
Balance at
December 31, 2011 ....
Stock-based
compensation ........
Exercise of employee
stock options,
including net tax
shortfall of $215 ...
Restricted stock issued
Stock repurchase ........
Foreign currency
translation
adjustments ...........
Net income ................
Balance at
December 31, 2012 ....
Stock-based
compensation ........
Exercise of employee
stock options,
including net tax
benefit of $437 .....
Restricted stock issued
Foreign currency
translation
adjustments ...........
Net income ................
Balance at
December 31, 2013 ....
Stock-based
compensation ........
Exercise of employee
stock options,
including net tax
benefit of $2,683 ..
Restricted stock issued
PSC of Canada
Exchange Corp.
shares exchanged ..
Restricted shares
issued related to
Ingeus acquisition,
unvested ................
Restricted shares
issued related to
Matrix acquisition,
unvested ................
Other ...........................
Foreign currency
translation
adjustments ...........
Net income ................
Balance at
-
-
3,873
90,915
73,081
-
-
-
-
-
-
-
-
733
-
-
-
-
10,506
592,126
99,239
-
-
-
-
-
-
-
-
7,562
512,927
74,714
-
-
13,702
-
261,694
1
6,960
596,915
1
(1)
38,569
-
946,723
-
-
-
1
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
7,562
-
18,504
-
(524)
- 13,702
(524)
-
-
39,162
(1,521)
(6,961)
(1,521)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
- 38,570
50
50
-
(7,337)
- 20,275
-
-
-
20,275
(7,337)
-
December 31, 2014 ....
16,870,285
17
261,155
(13,366)
(8,756)
1,014,108
(17,686)
50 221,414
See accompanying notes to the consolidated financial statements
69
The Providence Service Corporation
Consolidated Statements of Cash Flows
(in thousands)
Operating activities
Net income ......................................................................................... $
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation ..................................................................................
Amortization ...................................................................................
Provision for doubtful accounts ......................................................
Stock based compensation ..............................................................
Deferred income taxes ....................................................................
Amortization of deferred financing costs and debt discount ..........
Loss on extinguishment of debt .....................................................
Excess tax benefit upon exercise of stock options ..........................
Gains on remeasurement of contingent consideration ....................
Asset impairment charge ................................................................
Other non-cash charges ..................................................................
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable ....................................................................
Other receivables .........................................................................
Restricted cash ............................................................................
Prepaid expenses and other .........................................................
Reinsurance liability reserve .......................................................
Accounts payable and accrued expenses .....................................
Accrued transportation costs .......................................................
Deferred revenue .........................................................................
Other long-term liabilities ...........................................................
Net cash provided by operating activities ..........................................
Investing activities
Purchase of property and equipment ..................................................
Net increase (decrease) in short-term investments .............................
Acquisitions, net of cash acquired ......................................................
Restricted cash for reinsured claims losses ........................................
Net cash used in investing activities ...................................................
Financing activities
Repurchase of common stock, for treasury .......................................
Proceeds from common stock issued pursuant to stock option
exercise ...........................................................................................
Excess tax benefit upon exercise of stock options .............................
Proceeds from long-term debt ............................................................
Repayment of long-term debt .............................................................
Debt financing costs ...........................................................................
Capital lease payments and other .......................................................
Net cash provided by (used in) financing activities ...........................
Effect of exchange rate changes on cash ............................................
Net change in cash .............................................................................
Cash at beginning of period ...............................................................
Cash at end of period .......................................................................... $
Year ended December 31,
2013
2014
2012
20,275 $
19,438 $
8,482
14,051
15,437
2,589
7,562
(5,208)
5,561
-
(2,722)
(16,314)
6,915
3,088
(17,208)
327
266
(7,954)
3,761
28,483
530
(3,454)
(790)
55,195
(23,242)
(19)
(416,986)
(3,108)
(443,355)
7,738
7,134
3,245
3,079
(3,282 )
960
525
(1,120 )
-
492
364
7,186
1,199
(141 )
(856 )
(19 )
18,863
(6,354 )
(3,366 )
152
55,237
(10,183 )
177
(989 )
(2,848 )
(13,843 )
7,537
7,486
2,305
3,873
(816)
1,138
-
(91)
-
2,506
158
(16,589)
556
163
256
1,034
2,412
13,660
4,862
3,556
42,488
(9,522)
444
(190)
2,633
(6,635)
(524)
(547 )
(3,658)
11,019
2,722
501,200
(48,625)
(12,769)
73
453,096
(3,525)
61,411
98,995
160,406 $
10,069
1,120
76,000
(82,500 )
(2,082 )
(9 )
2,051
(313 )
43,132
55,863
98,995 $
949
91
-
(20,493)
(65)
(23)
(23,199)
25
12,679
43,184
55,863
See accompanying notes to the consolidated financial statements
70
-
190
-
-
-
-
-
190
The Providence Service Corporation
Supplemental Cash Flow Information
(in thousands)
Supplemental cash flow information
Cash paid for interest ......................................................................... $
Cash paid for income taxes ................................................................ $
PSC of Canada Exchange Corp. shares exchanged ............................ $
PSC of Canada Exchange Corp. shares converted to treasury shares
for fulfillment of obligation by sellers of WCG related to dispute
with British Columbia .................................................................... $
Acquisitions:
Year ended December 31,
2013
2014
2012
10,726 $
18,389 $
6,961 $
5,839 $
13,395 $
- $
6,505
8,877
-
1,521 $
- $
Purchase price ................................................................................. $
Less:
Cash acquired ..............................................................................
Common stock issued for acquistions of business ......................
Contingent consideration ...........................................................
Note payable to former shareholder ............................................
Amount due to former shareholder .............................................
Acquisitions, net of cash acquired ...................................................... $
525,596 $
37,159
38,570
30,095
600
2,186
416,986 $
989 $
-
-
-
-
-
989 $
See accompanying notes to the consolidated financial statements
71
The Providence Service Corporation
Notes to Consolidated Financial Statements
December 31, 2014
(in thousands except years, share and per share data)
1. Basis of Presentation, Description of Business, Significant Accounting Policies, Critical Accounting Estimates and
Recent Accounting Pronouncements
Basis of Presentation
The Providence Service Corporation (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, which the Company is required to follow. 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 US dollars, unless otherwise noted. In order to conform to the current year presentation, prior year
amounts have been reclassified to show service revenue as one line item, services expense as one line item, and interest
expense and interest income as interest expense, net. Additionally, prior year management fee receivables have been included
in other receivables for comparable presentation purposes.
Description of Business
The Company provides and manages primarily government sponsored non-emergency transportation, human services,
workforce development services and health assessment services. At December 31, 2014, the Company operated in four
segments, Non-Emergency Transportation Services (“NET Services”), Human Services, Workforce Development Services
(“WD Services”) and Health Assessment Services (“HA Services”). The NET Services segment manages transportation
networks and arranges for client transportation to health care related facilities and services for state or regional Medicaid
agencies, managed care organizations (“MCOs”) and commercial insurers. In the Human Services segment, counselors, social
workers and behavioral health professionals work with clients, primarily in the client’s home or community, who are eligible
for government assistance due to income level, disabilities or court order. The WD Services segment provides outsourced
employability services primarily to the eligible participants in government sponsored programs. The HA Services segment
provides comprehensive health assessments (“CHAs”), for members enrolled in Medicare Advantage (“MA”) health plans,
in patient’s homes or nursing facilities. As of December 31, 2014, the Company operated in 42 states and the District of
Columbia in the United States (“US”), and in 11 other countries.
Seasonality
The Company’s quarterly operating results and operating cash flows normally fluctuate as a result of seasonal variations
in its business. The NET Services operating segment experiences fluctuations in demand for its non-emergency transportation
services during the summer, winter and holiday seasons. Due to higher demand in the summer months and lower demand in
the winter and holiday seasons, coupled with a primarily fixed revenue stream based on a per member, per month payment
structure, the NET Services operating segment normally experiences lower operating margins in the summer season and
higher operating margins in the winter and holiday seasons.
The Human Services operating segment experiences lower client demand for its home and community based services
during the holiday and summer seasons which generally results in lower revenue during those periods. However, operating
expenses in the Human Services operating segment do not vary significantly with these changes. As a result, the Human
Services operating segment typically experiences lower operating margins during the holiday and summer seasons.
In the HA Services operating segment, CHAs are typically provided as part of a MA plan’s annual program and are
conducted with each individual member once per year. Historically, there has been higher CHA volume in the second half of
the calendar year as a result of an accelerating demand towards year-end.
72
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and all of its subsidiaries, including Ingeus
Limited and its wholly-owned subsidiaries (collectively, “Ingeus”) which were acquired on May 30, 2014, and CCHN Group
Holdings, Inc. and its wholly-owned subsidiaries (collectively, “Matrix”) which were acquired on October 23, 2014. All
intercompany accounts and transactions have been eliminated in consolidation.
Significant Accounting Policies
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, 2014 and 2013, approximately $42,651 and $4,607, respectively, of cash was held in foreign countries
and may not be freely transferable without unfavorable tax consequences.
Restricted Cash
The Company had approximately $18,571 and $15,729 of restricted cash at December 31, 2014 and 2013 as follows:
Collateral for letters of credit - Contractual obligations ............................................... $
Contractual obligations ................................................................................................
Subtotal restricted cash for contractual obligations ..................................................
Collateral for letters of credit - Reinsured claims losses ..............................................
Escrow/Trust - Reinsured claims losses .......................................................................
Subtotal restricted cash for reinsured claims losses ..................................................
Total restricted cash .....................................................................................................
December 31,
2014
2013
- $
573
573
3,033
14,965
17,998
18,571
243
839
1,082
3,033
11,614
14,647
15,729
Less current portion ......................................................................................................
3,807
3,772
$
14,764 $
11,957
Of the restricted cash amount at December 31, 2014 and 2013:
● $243 in 2013 served as collateral for irrevocable standby letters of credit that provide financial assurance that
the Company will fulfill certain contractual obligations;
●
●
approximately $573 and $839, respectively, was held to fund the Company’s obligations under arrangements
with various governmental agencies through the Company’s correctional services business;
approximately $3,033 in both periods served as collateral for irrevocable standby letters of credit to secure any
reinsured claims losses under the Company’s reinsurance program;
● of the remaining $14,965 and $11,614:
o
o
approximately $2,800 and $3,070, respectively, was restricted and held in a trust for historical
reinsurance claims losses under the Company’s general and professional liability reinsurance
program;
approximately $493 and $732, respectively, was restricted under the historical auto liability program;
and
73
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approximately $11,672 and $7,812, respectively, was restricted and held in a trust for reinsurance
claims losses under the Company’s workers’ compensation, general and professional liability and auto
liability reinsurance programs.
Short-Term Investments
As part of its cash management program, the Company from time to time maintains short-term investments. These
investments have a term to earliest maturity of less than one year and are comprised of certificates of deposit. These
investments are carried at cost, which approximates market value, and are classified as “Prepaid expenses and other” in the
consolidated balance sheets.
Fair Value of Financial Instruments
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. The fair value of the
Company’s long-term obligations is estimated based on interest rates for the same or similar debt offered to the Company
having the same or similar remaining maturities and collateral requirements. The carrying amount of the long-term
obligations approximates its fair value.
Accounts Receivable and Allowance for Doubtful Accounts
The Company records all accounts receivable amounts at their contracted 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 specific client collection issues. In
circumstances where the Company is aware of a specific payer’s inability to meet its financial obligation, the Company
records a specific allowance for doubtful accounts to reduce the net recognized receivable to the amount the Company
reasonably expects to collect.
The Company’s write-off experience for each of the years ended December 31, 2014, 2013 and 2012 was less than 1%
of the Company’s revenue. The Company’s provision for doubtful accounts expense for the years ended December 31, 2014,
2013 and 2012 was $2,589, $3,245 and $2,305, 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. 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.
Impairment of Long-Lived Assets
Goodwill
The Company analyzes the carrying value of goodwill at the end of each fiscal year, and more frequently if events occur
or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.
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. When analyzing goodwill for impairment the Company
first assesses qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment
test described below. If the Company determines, based on a qualitative assessment, that it is more likely than not that the
fair value of a reporting unit is less than its carrying amount, then the Company would calculate the fair value of the reporting
unit and perform a two-step quantitative goodwill impairment test. In connection with its analysis of the carrying value of
goodwill, the Company reconciles the aggregate fair value of its reporting units to the Company’s market capitalization
including a control premium that is reasonable within the context of industry data on premiums paid. When determining
whether goodwill is impaired, the Company compares the fair value of the reporting unit to which the goodwill is assigned
to the reporting unit’s carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value,
then the Company must proceed to a second step, and the amount of the impairment loss must be measured. The impairment
loss would be calculated by comparing the implied fair value of the reporting unit goodwill to its carrying amount. In
74
calculating the implied fair value of the reporting unit goodwill, the fair value of the reporting unit is allocated to all of the
other assets and liabilities of that unit based on their fair values. The excess of the fair value of a reporting unit over the
amount assigned to its other assets and liabilities is the implied fair value of goodwill. An impairment loss would be
recognized when the carrying amount of goodwill exceeds its implied fair value.
Intangible assets subject to amortization
The Company separately values all acquired and internally developed identifiable intangible assets apart from goodwill.
The Company has historically allocated a portion of the purchase consideration to customer relationships, developed
technology, management contracts, trademarks and trade names, and restrictive covenants acquired through business
combinations based on the expected direct or indirect contribution to future cash flows on a discounted cash flow basis over
the useful life of the assets.
The Company assesses whether any relevant factors limit the period over which acquired assets are expected to
contribute directly or indirectly to future cash flows for amortization purposes. While the Company uses discounted cash
flows to value the acquisition of intangible assets, the Company has elected to use the straight-line method of amortization
to determine amortization expense each period. If applicable, the Company assesses the recoverability of the unamortized
balance of its long-lived assets based on undiscounted expected future cash flows. Should this analysis indicate that the
carrying value is not fully recoverable, the excess of the carrying value over the fair value of any intangible asset is recognized
as an impairment loss.
Accrued Transportation Costs
Transportation costs are estimated and accrued in the month the services are rendered by contracted transportation
providers, and are determined using gross reservations for transportation services less cancellations, and average costs per
transportation service by customer contract. Average costs per contract are determined by historical cost trends. Actual costs
relating to a specific accounting period are monitored and compared to estimated accruals. Adjustments to those accruals are
made based on reconciliations with actual costs incurred. Accrued transportation costs were $55,492 and $54,962 at
December 31, 2014 and 2013, 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 borrowing. Fees charged by third parties are
recorded as deferred financing costs and fees charged by lenders are recorded as a debt discount. Deferred financing costs,
net of amortization, totaling approximately $5,284 and $2,509 at December 31, 2014 and 2013, respectively, are included in
“Other assets” in the consolidated balance sheets. Debt discount, net of amortization, totaling approximately $1,462 at
December 31, 2014 is included in “Long-term obligations, less current portion” in the consolidated balance sheet.
Revenue Recognition
NET Services segment
Capitation contracts. The majority of the Company’s NET services revenue is generated under capitated contracts with
payers where the Company assumes the responsibility of meeting the covered transportation requirements of a specific
geographic population for a fixed amount per period based on per-member per-month fees for an estimated number of
participants in the payer’s program.
Fee for service contracts. Revenues earned under fee for service (“FFS”) contracts are recognized when the service is
provided. Revenue under these types of contracts is based upon contractually established billing rates, less allowance for
contractual adjustments. Estimates of contractual adjustments are based upon payment terms specified in the related
agreements.
Flat fee contracts. Revenues earned under flat fee contracts are recognized ratably over the covered service period
based upon contractually established monthly flat fees that do not fluctuate with any changes in the membership population
that can receive the Company’s services.
75
Human Services segment
FFS contracts. Revenue related to services provided under FFS contracts is recognized at the time services are rendered
and collection is determined to be probable. Such services are provided at established billing rates. As services are rendered,
contract-specific documentation is prepared describing each service, time spent, and billing code to determine and support
the value of each service provided and billed. The timing and amount of collection are dependent upon compliance with the
billing requirements specified by each payer. Failure to comply with these requirements could delay the collection of amounts
due to the Company under a contract or result in adjustments to amounts billed.
The performance of the Company’s contracts is subject to the condition that sufficient funds are appropriated,
authorized and allocated by each state, city or other local government. If sufficient appropriations, authorizations and
allocations are not provided by the respective state, city or other local government, the Company is at risk for uncollectible
amounts or immediate termination or renegotiation of the financial terms of the Company’s contracts.
Cost-based service contracts. Revenues from the Company’s cost-based service contracts are recorded based on a
combination of allowable direct costs, indirect overhead allocations, and stated allowable margins on those incurred costs.
These revenues are compared to annual contract budget limits and, depending on reporting requirements, reductions of
revenue may be recorded for certain contingencies. The Company annually submits projected costs for the coming year,
which assist the contracting payers in establishing the annual contract amount to be paid for services provided under the
contracts. The Company submits monthly cost reports which are used by the payers to determine the need for any payment
adjustments. Completion of the cost report review process may range from one month to several years. In cases where funds
paid to the Company exceed the allowable costs to provide services under contract, the Company may be required to repay
amounts previously received.
The Company’s cost reports are generally audited by payers annually. The Company periodically reviews its provisional
billing rates and allocation of costs and provides for estimated payment adjustments. The Company believes that adequate
provisions have been made in its consolidated financial statements for any material adjustments that might result from the
outcome of any cost report audits. Differences between the amounts provided and the settlement amounts are recorded in the
Company’s consolidated statement of income in the year of settlement. Such settlements have historically not been material.
Annual block purchase contract. The Company’s annual block purchase contract requires the Company to provide or
arrange for behavioral health services to eligible populations of beneficiaries as defined in the contract. The Company must
provide a complete range of behavioral health clinical, case management, therapeutic and administrative services. The
Company is obligated to provide services only to those clients with a demonstrated medical necessity. The Company’s annual
funding allocation amount may be increased when its patient service encounters exceed the contract amount; however, such
increases are subject to government appropriation. There is no contractual limit to the number of eligible beneficiaries that
may be assigned to the Company, or a specified limit to the level of services that may be provided to these beneficiaries if
the services are deemed to be medically necessary. Therefore, the Company is at-risk if the costs of providing necessary
services exceed the associated reimbursement.
The terms of the contract may be reviewed prospectively and amended as necessary to ensure adequate funding of the
Company’s contractual obligations; however, there is no assurance that amendments will be approved or that funding will be
adequate.
Workforce Development Services segment
Workforce Development Services revenues are generated from providing resume and job interview skills, networking
and job placement services, and technical job training through internally staffed or outsourced resources. The Company’s
revenue is largely based on successful job placement and sustainment outcomes. While the specific terms vary by contract
and country, the Company generally receives four types of revenue streams under contracts with government entities:
attachment fees, job placement/job outcome fees, sustainment fees and incentive fees. Attachment fees are typically upfront
payments that are payable when a client enters the system. Job placement fees are typically payable when a client is employed,
whereas job outcome fees are typically payable when a client is employed, and remains employed for a specified period of
time. Sustainment fees are typically payable upon certain employment tenure milestones. Finally, incentive fees vary greatly
by contract, and are usually based upon a calculation that includes a variety of factors and inputs, such as average sustainment
rates and client referral rates.
76
Revenue is recognized ratably over the period from initial contact with a client to the average period services are
provided, as is the case for attachment fees, or when certain milestones are achieved, as is the case with job placement/job
outcome fees and sustainment fees. Incentive fees are generally recognized when the revenue is fixed and determinable,
frequently at the end of the cumulative calculation period, unless the contractual terms allow for earned payments on a fixed
or ratable basis.
Health Assessment Services segment
The HA Services segment contracts with health plans to provide clinical assessments for their MA members that meet
certain pre-determined criteria as defined by the providers. An assessment is a comprehensive physical examination of an
individual performed by one of the Company’s physicians or nurse practitioners. The MA clients for whom the Company
performs these examinations use the assessment reports to impact care management of the MA member and properly report
the cost of care of those members. Revenue is recognized in the period in which the services are rendered.
Deferred Revenue
At times the Company 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.
Income Taxes
Deferred income taxes are determined by the liability method in accordance with ASC Topic 740 - Income Taxes (“ASC
740”). 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 will be in effect when the differences are expected to reverse. The Company
records a valuation allowance which includes amounts for net operating loss and tax credit carryforwards, as more fully
described in Note 15 below, 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.
Foreign currency translation
Local currencies generally are considered the functional currencies outside the US. Assets and liabilities for operations
in local-currency environments are translated at month-end exchange rates of the period reported. Income and expense items
are translated at the average exchange rate for each applicable month. Cumulative translation adjustments are recorded as a
component of accumulated other comprehensive income (loss) in stockholders’ equity.
Loss Reserves for Certain Reinsurance and Self-funded Insurance Programs
The Company reinsures a substantial portion of its automobile, general and professional liability and workers’
compensation costs under reinsurance programs through the Company’s wholly-owned subsidiary Social Services Providers
Captive Insurance Company (“SPCIC”), a licensed captive insurance company domiciled in the State of Arizona. SPCIC
maintains reserves for obligations related to the Company’s reinsurance programs for its automobile, general and professional
liability and workers’ compensation coverage.
SPCIC reinsures third-party insurers for general and professional liability exposures for the first dollar of each and
every loss up to $1,000 per loss and $5,000 in the aggregate. SPCIC also reinsures third-party insurers for automobile liability
exposures for $250 per claim. Additionally, SPCIC reinsures a third-party insurer for worker’s compensation insurance for
the first dollar of each and every loss up to $500 per occurrence with a $13,700 annual policy aggregate limit. As of
December 31, 2014 and 2013, the Company had reserves of approximately $12,750 and $10,635, respectively, for the
automobile, general and professional liability and workers’ compensation programs (net of expected losses in excess of the
Company’s liability which would be paid by third-party insurers to the extent losses are incurred). The reserves are classified
as “Reinsurance liability reserve” and “Other long-term liabilities” in the consolidated balance sheets.
77
Based on an independent actuarial report, the Company’s expected losses related to workers’ compensation, automobile
and general and professional liability in excess of its liability under its associated reinsurance programs at December 31,
2014 and 2013 was approximately $5,525 and $3,540, respectively. The Company recorded a corresponding receivable from
third-party insurers and liability at December 31, 2014 and 2013 for these expected losses, which would be paid by third-
party insurers to the extent losses are incurred.
In addition, the Company’s wholly-owned subsidiary, Provado Insurance Services, Inc. (“Provado”), is a licensed
captive insurance company domiciled in the State of South Carolina. Provado has historically provided reinsurance for
policies written by a third party insurer for general liability, automobile liability, and automobile physical damage coverage
to various members of the network of subcontracted transportation providers and independent third parties within the
Company’s NET Services operating segment. Effective February 15, 2011, Provado did not renew its reinsurance agreement
and will not assume liabilities for policies after that date. It will continue to administer existing policies for the foreseeable
future and resolve remaining and future claims related to these policies.
Under a reinsurance agreement with a third party insurer, Provado reinsures the third party insurer for the first $250 of
each loss for each line of coverage, subject to an annual aggregate equal to 107.7% of gross written premium, and certain
claims in excess of $250 to an additional aggregate limit of $1,100. Provado maintains reserves for obligations related to the
reinsurance programs for general liability, automobile liability, and automobile physical damage coverage. As of
December 31, 2014 and 2013, Provado recorded reserves of approximately $1,434 and $1,880, respectively. The reserves are
classified as “Reinsurance liability reserve” in the consolidated balance sheets.
The Company utilizes analyses prepared by third party administrators and independent actuaries based on historical
claims information with respect to the general and professional liability coverage, workers’ compensation coverage,
automobile liability, automobile physical damage, and health insurance coverage to determine the amount of required
reserves.
The Company also maintains a self-funded health insurance program with a stop-loss umbrella policy with a third party
insurer to limit the maximum potential liability for individual claims to $275 per person and for a maximum potential claim
liability based on member enrollment. 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, 2014 and
2013, the Company had approximately $1,973 and $1,870, respectively, in reserve for its self-funded health insurance
programs. The reserves are classified as “Reinsurance liability reserve” in the consolidated balance sheets.
The Company regularly analyzes its reserves for incurred but not reported claims, and for reported but not paid claims
related to its reinsurance and self-funded insurance programs. The Company believes its reserves are adequate. However,
significant judgment is involved in assessing these reserves such as assessing historical paid claims, average lags between
the claims’ incurred date, reported dates and paid dates, and the frequency and severity of claims. There may be differences
between actual settlement amounts and recorded reserves and any resulting adjustments are included in expense once a
probable amount is known. There were no significant adjustments recorded in the periods covered by this report.
Critical Accounting Estimates
The Company has made a number of estimates relating to the reporting of assets and liabilities, revenues and expenses
and the disclosure of contingent assets and liabilities to prepare the consolidated financial statements in conformity with
GAAP. The Company based its estimates on historical experience and on various other assumptions the Company believes
to be reasonable under the circumstances. However, actual results may differ from these estimates under different
assumptions or conditions. Some of the more significant estimates impact revenue recognition, accounts receivable and
allowance for doubtful accounts, accounting for business combinations, goodwill and other intangible assets, accrued
transportation costs, loss reserves for reinsurance and self-funded insurance programs, stock-based compensation and income
taxes.
Recent Accounting Pronouncements
In April 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-08, Presentation of Financial
Statements (Topic 2015) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and
Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). ASU 2014-08 changes the requirements for reporting
discontinued operations. Under the ASU discontinued operations is defined as either a:
●
Component of an entity, or group of components that
78
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has been disposed of, meets the criteria to be classified as held-for-sale, or has been
abandoned/spun-off; and
represents a strategic shift that has (or will have a major effect on an entity’s operations
and financial results), or
●
Business or nonprofit activity that, on acquisition, meets the criteria to be classified as held-for-sale.
This ASU is effective for publicly held companies prospectively for all disposals (or classifications as held for sale) of
components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods
within those years, and all businesses that, on acquisition, are classified as held for sale that occur within annual periods
beginning on or after December 15, 2014, and interim periods within those years. The Company will prospectively apply this
accounting literature in 2015.
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers: Topic 606 (“ASU 2014-
09”). This ASU will supersede the revenue recognition requirements in Topic 605, Revenue Recognition, and most industry-
specific guidance. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of
promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled
in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps:
●
●
●
Step 1: Identify the contract(s) with a customer.
Step 2: Identify the performance obligations in the contract.
Step 3: Determine the transaction price.
● Step 4: Allocate the transaction price to the performance obligations in the contract.
● Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.
For a publicly held entity, this ASU is effective for annual reporting periods beginning after December 15, 2016,
including interim periods within that reporting period. Early application is not permitted. The Company is currently
evaluating the impact ASU 2014-09 will have on its consolidated financial statements.
2. Concentration of Credit Risk
Contracts with domestic governmental agencies and other domestic entities that contract with governmental agencies
accounted for approximately 73.0%, 80.0% and 81.1% of the Company’s domestic revenue for the years ended
December 31, 2014, 2013 and 2012, respectively. Contracts with foreign governmental agencies and other foreign entities
that contract with governmental agencies accounted for approximately 94.6% of the Company’s foreign revenue for the year
ended December 31, 2014. In years past, the Company’s international presence was not material. The governmental contracts
are subject to possible statutory and regulatory changes, rate adjustments, administrative rulings, rate freezes and funding
reductions. Reductions in amounts paid under these contracts for the Company’s services or changes in methods or
regulations governing payments for the Company’s services could materially adversely affect its revenue and profitability.
Additionally, approximately 68.0% of our Workforce Development Services revenue for the year ended December 31, 2014
was generated from one foreign payer.
At December 31, 2014, approximately $40,213, or 18.2%, of the Company’s net assets were located in countries outside
of the US.
79
3. Prepaid Expenses and Other
Prepaid expenses and other were comprised of the following:
December 31,
2014
2013
Prepaid income taxes ........................................................................................
Prepaid insurance .............................................................................................
Prepaid taxes and licenses ................................................................................
Prepaid rent ......................................................................................................
Deposits held for leased premises & bonds ......................................................
Preferred share backstop fee paid to related party ............................................
Other ................................................................................................................
13,865
5,496
4,752
3,441
3,249
2,947
12,407
1,427
4,409
66
1,685
-
-
4,244
Total prepaid expenses and other ..................................................................... $
46,157 $
11,831
4. Property and Equipment
Property and equipment consisted of the following:
Land ...................................................................................
Building ..............................................................................
Computer and telecom equipment ......................................
Software .............................................................................
Leasehold improvements....................................................
Furniture and fixtures .........................................................
Automobiles .......................................................................
Construction in progress ....................................................
$
Estimated
Useful Life
(in years)
--
39
3-5
3-5
Shorter of 7
years
or lease term
5-10
5
--
Less accumulated depreciation ...........................................
Total property and equipment, net .....................................
$
December 31,
2014
2013
1,911 $
11,877
36,696
17,820
15,692
7,724
4,643
3,065
99,428
42,280
57,148 $
1,911
11,629
25,138
12,333
6,528
3,963
2,732
1,816
66,050
33,341
32,709
Depreciation expense was approximately $14,051, $7,738 and $7,537 for the years ended December 31, 2014, 2013
and 2012, respectively.
80
113,915
(160)
(492)
270,456
(157,193)
113,263
35,484
210,576
5,971
(2,738)
(6,915)
5. Goodwill and Intangibles
Goodwill
Changes in goodwill were as follows:
Balance at December 31, 2012 ............................ $
95,215 $
18,700 $
NET
Services
Human
Services
WD
Services
HA
Services
- $
- $
Consolidated
Total
Foreign currency translation adjustment ..............
Impairment charge ...............................................
Balances at December 31, 2013
Goodwill ...........................................................
Accumulated impairment losses .......................
-
-
(160)
(492)
191,215
(96,000)
95,215
79,241
(61,193)
18,048
-
-
-
-
-
-
-
-
-
-
Ingeus acquisition .................................................
Matrix acquisition ................................................
Other acquisitions .................................................
Foreign currency translation adjustment ..............
Impairment charge ...............................................
Balances at December 31, 2014 ...........................
Goodwill ...........................................................
Accumulated impairment losses .......................
$
-
-
-
-
-
-
-
5,971
(177)
(6,915)
35,484
-
-
(2,561)
-
-
210,576
-
-
-
191,215
(96,000)
95,215 $
85,035
(68,108)
16,927 $
32,923
-
32,923 $
210,576
-
210,576 $
519,749
(164,108)
355,641
In conjunction with its annual review of goodwill impairment as of December 31, 2014, the Company performed the
two-step impairment analysis and determined that goodwill was impaired for two of its Human Services segment reporting
units. The goodwill impairment in the Maple Star reporting unit was attributable to declines in forecasted referrals, leading
to a decline in projected future cash flows of the entity. The Company recorded an impairment charge of $3,810 related to
the Maple Star reporting unit. The impairment for the second reporting unit was attributable to lower than expected
performance during 2014 in the Providence of Idaho reporting unit, as well as a lower than expected projections in future
years. An impairment charge of $2,815 was recorded related to the Providence of Idaho reporting unit.
Additionally, based on a triggering event for one of the Human Services segment reporting units, the Company recorded
a goodwill impairment charge of approximately $290 prior to conducting its annual asset impairment test.
Also in conjunction with its annual review of goodwill impairment as of December 31, 2014, the Company performed
the two-step analysis of its Ingeus reporting unit. After completing step one, the Company concluded the fair value of the
reporting unit was less than its carrying value, requiring the Company to proceed to the second step of the two-step goodwill
impairment test. As part of the Step 2 analysis, the Company analyzed its long-term assets, including property, plant and
equipment, and its intangible assets. Based on this review, it was determined that the undiscounted cash flows from the
reporting unit exceeded its carrying value. However, in determining the implied fair value of goodwill for the Ingeus reporting
unit, the assigned fair value of the Ingeus reporting unit’s intangible assets as of December 31, 2014 was $13,700 less than
the carrying value. In accordance with ASC 350, the assignment of fair value to the assets and liabilities of the reporting unit
is solely for the purpose of testing goodwill for impairment, the assets and liabilities of the reporting unit are not written up
or down as a result of the allocation process. Based on the two-step analysis described above, the Company concluded the
implied fair value of the Ingeus reporting unit goodwill exceeded its carrying value by $18,500. Accordingly, the Company
concluded there was no impairment in its Ingeus reporting unit goodwill, and did not recognize any charges related to
goodwill impairment as of December 31, 2014.
The Company believes the assumptions used in its discounted cash flow analysis are appropriate and result in reasonable
estimates of the implied fair value of each reporting unit. The Company further believes the most significant assumptions
used in its analysis are the expected revenue growth, margins and overall profitability of its reporting units. However, the
Company may not meet its revenue growth and profitability targets, working capital needs and capital expenditures may be
higher than forecast, changes in credit or equity markets may result in changes to the Company’s discount rate and general
business conditions may result in changes to the Company’s terminal value assumptions for its reporting units. The amount
of goodwill associated with Ingeus was $32,923 at December 31, 2014.
81
During the quarter ended June 30, 2013, the not-for-profit entities managed by Rio Grande Management Company,
L.L.C. (“Rio”), a wholly-owned subsidiary of the Company, were notified of the termination of funding for certain of their
services. Management expected that due to this change in funding, the not-for-profit entities would not be able to maintain
their historical level of business, which was expected to result in the decrease, or elimination of, services provided by Rio to
these entities. The Company determined that these factors were indicators that an interim goodwill impairment test was
required under ASC 350. As a result, the Company estimated the fair value of the goodwill it acquired in connection with the
Rio acquisition to be zero at June 30, 2013, and at that time, the Company recorded a non-cash charge of $492 in its Human
Services operating segment to eliminate the carrying value of goodwill acquired in connection with its acquisition of Rio.
This charge is included in “Asset impairment charge” in the consolidated statements of income for the year ended
December 31, 2013.
In connection with its annual asset impairment analysis conducted as of December 31, 2013, the Company determined
that no additional impairment charges were required to fairly state the value of these assets.
The total amount of goodwill that was deductible for income tax purposes for acquisitions as of December 31, 2014
and 2013 was approximately $43,776 and $36,870, respectively.
Intangible Assets
Intangible assets are comprised of acquired customer relationships, trademarks and trade names, developed technology,
management contracts and restrictive covenants. Intangible assets consisted of the following:
December 31,
2014
2013
Estimated
Useful Life
Customer relationships ..
Customer relationships ..
Customer relationships ..
Customer relationships ..
Management contracts ..
Trademarks and Trade
$
(in Yrs)
15
10
5
3
10
Gross
Carrying
Amount
Accumulated
Amortization
Gross
Carrying
Amount
73,837 $
223,118
4,100
1,039
7,775
(38,012) $
(6,999)
(227)
(370)
(7,348)
Accumulated
Amortization
(33,319)
(1,027)
-
(21)
(9,975)
73,990 $
1,417
-
989
11,422
Names .......................
Indefinite
25,900
-
-
-
Trademarks and Trade
Names .......................
Developed technology ...
Restrictive Covenants ....
Total ..............................
10
5
2
$
16,724
44,016
50
396,559 $
(976)
(1,950)
(4)
(55,886) $
-
-
-
87,818 $
-
-
-
(44,342)
The weighted-average amortization period at December 31, 2014 for intangibles with a definite life was 10.3 years. No
significant residual value is estimated for these intangible assets. Amortization expense was approximately $15,437, $7,134
and $7,486 for the years ended December 31, 2014, 2013 and 2012, respectively. The total amortization expense is estimated
to be as follows for the next five years and thereafter, based on completed acquisitions as of December 31, 2014:
Year
2015
2016
2017
2018
2019
Thereafter
Total
Amount
$
39,218
38,728
38,279
38,279
35,883
124,386
314,773
$
In connection with its annual asset impairment analysis conducted as of December 31, 2014 and 2013, the Company
determined that no impairment charges were required to fairly state the value of these assets.
82
6. Accrued Expenses
Accrued expenses consisted of the following:
Accrued compensation ................................................................................................. $
NET Services contract adjustments ..............................................................................
Contingent consideration .............................................................................................
Other ............................................................................................................................
Total accrued expenses ................................................................................................ $
46,425 $
27,380
7,767
40,285
121,857 $
22,940
12,445
-
17,099
52,484
December 31,
2014
2013
7. Fair Value Measurements
The Company determines the fair value of its financial instruments based on the fair value hierarchy, which requires an
entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Below are the three levels of inputs that may be used to measure fair value:
Level 1 – Quoted prices in active markets for identical assets or liabilities that the Company has the ability to access 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
other operating expenses in the condensed 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 that relate to events occurring
subsequent to the date of acquisition could significantly impact the fair value of the obligation recorded in the accompanying
condensed consolidated balance sheets and operating expenses in the condensed consolidated statements of income. The fair
value of the Company’s contingent consideration was $11,429 at December 31, 2014, of which $7,767 is included in
“Accrued expenses” and $3,662 is included in “Other long-term liabilities” in the consolidated balance sheets. The Company
recorded a gain due to a change in the estimated fair value of contingent consideration of $16,314 within “General and
administrative expense” in the consolidated statement of income for the year ended December 31, 2014.
83
8. Long-Term Obligations and Note Payable to Related Party
The Company’s long-term obligations were as follows:
December 31, December 31,
2014
2013
6.5% convertible senior subordinated notes, interest payable semi-annually beginning
May 2008 with principal due May 2014 (the "Notes") ................................................. $
- $
47,500
$240,000 revolving loan (previously $165,000; amended May 28, 2014), LIBOR plus
2.25% - 3.25% (effective rate of 3.16% at December 31, 2014) through August
2018 with interest payable at least once every three months ........................................
$250,000 term loan, LIBOR plus 2.25% - 3.25%, with principal payable quarterly
beginning March 31, 2015 and interest payable at least once every three months,
through August 2018 ....................................................................................................
$60,000 term loan, LIBOR plus 2.25% - 3.25%, with principal payable quarterly
beginning December 31, 2014 and interest payable at least once every three months,
through August 2018 ....................................................................................................
14.0% unsecured related party, subordinated bridge note with principal due
201,700
16,000
250,000
-
58,875
60,000
September 30, 2018 and interest payable quarterly .....................................................
65,500
-
2.0% unsecured, subordinated note to former stockholder of acquired company,
principal and interest due May 2016 .............................................................................
Unamortized discount on debt ..........................................................................................
Less current portion ..........................................................................................................
Total long-term obligations, less current portion ............................................................. $
600
576,675
(1,462 )
575,213
90,688
484,525 $
-
123,500
-
123,500
48,250
75,250
The carrying amount of the long-term obligations approximated their fair value at December 31, 2014 and 2013. The
fair value of the Company’s long-term obligations was estimated based on interest rates for the same or similar debt offered
to the Company having same or similar remaining maturities and collateral requirements.
Annual maturities of long-term obligations as of December 31, 2014 are as follows:
Year
2015
2016
2017
2018
Total
Amount
90,688
32,938
41,287
411,762
576,675
$
$
Convertible senior subordinated notes
On November 13, 2007, the Company issued $70,000 in aggregate principal amount of 6.5% Convertible Senior
Subordinated Notes due in 2014 (the “Senior Notes”), under the amended note purchase agreement dated November 9, 2007
to the purchasers named therein. The proceeds of $70,000 were initially placed into escrow and were released on December 7,
2007 to partially fund the cash portion of the purchase price of Charter LCI Corporation, including its subsidiaries,
collectively referred to as LogistiCare. The Senior Notes were general unsecured obligations subordinated in right of payment
to any existing or future senior debt. The Senior Notes matured on May 15, 2014, and the Company repaid the balance of
$47,500 with cash on hand.
Credit facility
On August 2, 2013, the Company entered into an Amended and Restated Credit Agreement with Bank of America,
N.A., as administrative agent, swing line lender and letter of credit issuer, SunTrust Bank, as syndication agent, Merrill
Lynch, Pierce, Fenner & Smith Incorporated and SunTrust Robinson Humphrey, Inc., as joint lead arrangers and joint book
managers and other lenders party thereto. The Amended and Restated Credit Agreement provided the Company with a senior
secured credit facility (“Credit Facility”), in aggregate principal amount of $225,000, comprised of a $60,000 term loan
84
facility and a $165,000 revolving credit facility. The New Senior Credit Facility included sublimits for swingline loans and
letters of credit in amounts of up to $10,000 and $25,000, respectively. On August 2, 2013, the Company borrowed the entire
amount available under the term loan facility and $16,000 under the revolving credit facility and used the proceeds thereof
to refinance certain of the Company’s existing indebtedness.
Under the Credit Facility, the Company has an option to request an increase in the amount of the revolving credit facility
and/or the term loan facility from time to time (on substantially the same terms as apply to the existing facilities) in an
aggregate amount of up to $75,000 with either additional commitments from lenders under the Amended and Restated Credit
Agreement at such time or new commitments from financial institutions acceptable to the administrative agent in its
reasonable discretion, so long as no default or event of default exists at the time of any such increase. The Company may not
be able to access additional funds under this increase option as no lender is obligated to participate in any such increase under
the Credit Facility.
The Credit Facility matures on August 2, 2018. The Company may prepay the Credit Facility in whole or in part, at any
time without premium or penalty, subject to reimbursement of the lenders’ breakage and redeployment costs in connection
with prepayments of London Interbank Offered Rate (“LIBOR”) loans. The unutilized portion of the commitments under the
Credit Facility may be irrevocably reduced or terminated by us at any time without penalty.
The Company’s obligations under the Credit Facility are guaranteed by all of its present and future domestic
subsidiaries, excluding certain domestic subsidiaries, which include its insurance captives and not-for-profit subsidiaries. The
Company’s, and each guarantor’s, obligations under its guaranty of the Credit Facility are secured by a first priority lien on
substantially all of the Company’s respective assets, including a pledge of 100% of the issued and outstanding stock of its
domestic subsidiaries and 65% of the issued and outstanding stock of its first tier foreign subsidiaries.
On May 28, 2014, the Company entered into the first amendment (the “First Amendment”) to its Credit Facility. The
First Amendment provided for, among other things, an increase in the aggregate amount of the revolving credit facility from
$165,000 to $240,000 and other modifications in connection with the consummation of the acquisition of Ingeus.
Additionally, on October 23, 2014, the Company entered into the Second Amendment to the Amended and Restated
Credit and Guaranty Agreement and Consent (the “Second Amendment”) to amend the Credit Facility to (i) add a new term
loan tranche in aggregate principal amount of up to $250,000 to partly finance the acquisition of Matrix, (ii) provide the
consent of the required lenders to consummate the acquisition of Matrix, (iii) permit incurrence of additional debt (including
the Related party unsecured subordinated bridge note, described below) to fund the acquisition of Matrix, (iv) add an excess
cash flow mandatory prepayment provision and (v) such other amendments which are beneficial to the Company and provide
greater flexibility for its future operations.
Interest on the outstanding principal amount of the loans accrue, at the Company’s election, at a per annum rate equal
to LIBOR, plus an applicable margin or the base rate plus an applicable margin. The applicable margin ranges from 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 Second Amendment. Interest on the loans is payable at least every
three months in arrears. In addition, the Company is obligated to pay commitment fees based on a percentage of the unused
portion of each lender’s commitment under the revolving credit facility and letter of credit fees based on a percentage of the
maximum amount available to be drawn under each outstanding letter of credit. The commitment fee and letter of credit fee
ranges from 0.25% to 0.50% and 2.25% to 3.25%, respectively, in each case, based on the Company’s consolidated leverage
ratio.
The $60,000 term loan is subject to quarterly amortization payments, commencing on December 31, 2014, so that the
following percentages of the term loan outstanding on the closing date plus the principal amount of any term loans funded
pursuant to the increase option are repaid as follows: 7.5% between December 31, 2014 and September 30, 2015, 10.0%
between December 31, 2015 and September 30, 2016, 12.5% between December 31, 2016 and September 30, 2017, 11.25%
between December 31, 2017 and June 30, 2018 and the remaining balance at maturity.
The $250,000 term loan is subject to quarterly amortization payments, commencing on March 31, 2015, so that the
following percentages of the term loan outstanding on the closing date plus the principal amount of any term loans funded
pursuant to the increase option are repaid as follows: 5.625% between March 31, 2015 and September 30, 2015, 10.0%
between December 31, 2015 and September 30, 2016, 12.5% between December 31, 2016 and September 30, 2017, 11.25%
between December 31, 2017 and June 30, 2018 and the remaining balance at maturity.
85
The Credit Facility also requires the Company (subject to certain exceptions as set forth in the Amended and Restated
Credit Agreement) to prepay the outstanding loans in an aggregate amount equal to 100% of the net cash proceeds received
from certain asset dispositions, debt issuances, insurance and casualty awards and other extraordinary receipts.
The Amended and Restated Credit Agreement contains customary affirmative and negative covenants and events of
default. The negative covenants include restrictions on the Company’s ability to, among other things, incur additional
indebtedness, create liens, make investments, give guarantees, pay dividends, sell assets and merge and consolidate. The
Company is subject to financial covenants, including consolidated net leverage and consolidated fixed charge covenants. The
Company was in compliance with all covenants as of December 31, 2014.
The Company incurred fees of approximately $12,738 to refinance our long-term debt during 2014. We have accounted
for fees related to the refinancing of our long-term debt, as well as unamortized deferred financing fees related to the Senior
Credit Facility, under ASC 470-50 – Debt Modifications and Extinguishments. As both credit facilities were loan
syndications, and a number of lenders participated in both credit facilities, we evaluated the accounting for financing fees on
a lender by lender basis. Of the total amount of fees incurred for the refinancing of debt, approximately $5,224 was deferred
as deferred financing fees or debt discount, and will be amortized over the life of the loans, approximately $4,500 was deferred
and fully expensed in the fourth quarter of 2014 in relation to bridge financing commitments and approximately $3,014 was
expensed in 2014.
Related party unsecured subordinated bridge note
On October 23, 2014, the Company issued to Coliseum Capital Management, LLC and certain of its affiliates
(“Coliseum”), a related party, a 14.0% Unsecured Subordinated Note in aggregate principal amount of $65,500 (the “Note”)
due September 30, 2018. Interest from the issuance date to, but excluding, the 120th day after the issuance date, was paid in
cash in the amount of $3,015 on the issuance of the Note, of which $1,281 is included in “Prepaid expenses and other” in the
consolidated balance sheet as of December 31, 2014. Coliseum held approximately 15% of the Company’s outstanding
common stock as of October 23, 2014 and is the Company’s largest shareholder. Additionally, Christopher Shackelton, who
serves on the Company’s board of directors, is also a Managing Partner at Coliseum Capital Management, LLC.
The Note was repaid in full on February 11, 2015, with the proceeds from a registered Rights Offering (“Rights
Offering”) and a related standby purchase agreement. The Rights Offering allowed 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
of $100.00 per share, as further described in Note 21. As such, the Note was classified as a current liability at December 31,
2014.
9. Stockholders’ Equity
The Company’s second amended and restated certificate of incorporation provides that the Company’s authorized
capital stock consists of 40,000,000 shares of common stock, $0.001 par value per share, and 10,000,000 shares of preferred
stock, $0.001 par value per share.
At December 31, 2014 and 2013, there were 16,870,285 and 14,477,312 shares of the Company’s common stock
outstanding, respectively, (including 1,014,108 treasury shares at December 31, 2014 and 956,442 treasury shares at
December 31, 2013) and no shares of preferred stock outstanding.
The following table reflects the total number of shares of the Company’s common stock reserved for future issuance as
of December 31, 2014:
Shares of common stock reserved for:
Exercise of stock options and restricted stock awards .......................................................................
Issuance of Performance Restricted Stock Units ...............................................................................
1,501,884
91,847
Total shares of common stock reserved for future issuance ..................................................................
1,593,731
86
During the year ended December 31, 2014, the Company granted a total of 463,000 stock options under the 2006 Long-
Term Incentive Plan (“2006 Plan”) to purchase the Company’s common stock at exercise prices equal to the market value of
the Company’s common stock on the date of grant. The options were granted to executive officers and certain key employees.
The option exercise price for all options granted ranged from $36.27 to $43.81. 300,000 options vest in three equal
installments on September 11, 2014, June 30, 2015 and June 30, 2016. 163,000 options cliff vest on December 31, 2017. The
weighted-average fair value of the options granted during the year ended December 31, 2014 totaled $17.09 per share.
During the year ended December 31, 2014, the Company granted 52,530 shares of restricted stock to non-employee
directors of its board of directors, 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. Additionally, during the year ended December
31, 2014, the Company granted an additional 567,069 shares to two individuals in connection with the Ingeus acquisition.
The awards vest, upon continued employment of the grantees, in four equal installments on each anniversary date of the
grant. The weighted-average fair value of all restricted stock awards granted in 2014 totaled $39.80 per share.
During the year ended December 31, 2014, the Company issued 298,186 shares of its common stock in connection with
the exercise of employee stock options under the Company’s 2006 Stock Option Plan (“2006 Plan”). In addition, during the
year ended December 31, 2014, the Company issued 214,741 shares of its common stock in connection with the exercise of
employee stock options under the Company’s 2003 Stock Option Plan (“2003 Plan”). During 2014, the Company also issued
74,714 shares of its common stock to non-employee directors, executive officers and key employees upon the vesting of
certain restricted stock awards granted in 2013, 2012 and 2011 under the Company’s 2006 Plan. In connection with the
vesting of these restricted stock awards, 18,504 shares of the Company’s common stock were surrendered to the Company
by the recipients to pay their associated taxes due to the federal and state taxing authorities during 2014. These shares were
placed in treasury.
On February 1, 2007, the Company’s board of directors approved a stock repurchase program for up to one million
shares of its common stock. The Company may purchase shares of its common stock from time to time in the open market
or in privately negotiated transactions, depending on the market conditions and the Company’s capital requirements. As of
December 31, 2013, the Company spent approximately $14,376 to purchase 756,100 shares of its common stock in the open
market since the inception of this stock repurchase program. No additional repurchases were made during 2014.
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 stockholders, and are entitled to any dividends that may be declared by the Company’s board of directors. 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.
10. Stock-Based Compensation Arrangements
The Company provides stock-based compensation under the Company’s 2003 Plan and 2006 Plan to employees, non-
employee directors, consultants and advisors. Upon stockholder approval in May 2006, the 2006 Plan replaced the former
1997 Stock Option and Incentive Plan (“1997 Plan”) and 2003 Plan. While all awards outstanding under the 2003 Plan remain
in effect in accordance with their terms, no additional grants or awards will be made under this plan. The 1997 Plan has
expired and no awards were outstanding under the 1997 Plan as of December 31, 2014.
To achieve the purposes of the Company’s stock-based compensation program described above, 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.
Stock option awards granted under the 2003 Plan and 2006 Plan were generally ten year options granted at fair market
value on the date of grant with time based vesting over a period determined at the time the options were granted, ranging
from one to four years (which is equal to the requisite service period). However, 163,000 stock options granted in
December 2014 had a term of approximately 3.25 years. The Company does not intend to pay dividends on unexercised
options. New shares of the Company’s common stock are issued when the options are exercised.
87
The following table summarizes the activity under the 1997 Plan, 2003 Plan and 2006 Plan as of December 31, 2014:
Number of shares
of the Company's
common stock
authorized for
issuance
Number of shares
of the Company's
common stock
remaining
available for
future grants
Number of shares of the Company's
common stock subject to
Options
Stock Grants
1997 Plan ...............
2003 Plan ..............
2006 Plan ...............
Total ......................
428,572
1,400,000
4,400,000
6,228,572
-
-
1,061,252
1,061,252
-
50,760
762,862
813,622
-
-
780,109
780,109
The Company chose to follow the short-cut method prescribed by ASC 718 to calculate its pool of excess tax benefits
available to absorb tax deficiencies recognized subsequent to the adoption of ASC 718 (“APIC pool”). There was no effect
on the Company’s financial results for 2014, 2013 or 2012 related to the application of the short-cut method to determine its
APIC pool balance.
The Company calculates the fair value of stock options using the Black-Scholes option-pricing formula. Stock-based
compensation expense charged against income for stock options and stock grants awarded during the years ended
December 31, 2014, 2013 and 2012 was based on the grant-date fair value adjusted for estimated forfeitures based on awards
expected to vest in accordance with the provisions of ASC 718. For stock-based compensation awards granted during 2014,
2013 and 2012, the associated expense is amortized over the vesting period of primarily three years. Additionally, ASC 718
requires forfeitures to be estimated at the time of grant and revised as necessary in subsequent periods if the actual forfeitures
differ from those estimates.
The following table reflects the amount of stock-based compensation, for share settled awards, recorded in each
financial statement line item for the years ended December 31, 2014, 2013 and 2012:
Service expense ............................................................................ $
General and administrative expense .............................................
Total stock-based compensation .................................................. $
4,025 $
3,537
7,562 $
1,658 $
1,421
3,079 $
2,146
1,727
3,873
Year ended December 31,
2013
2012
2014
Stock-based compensation included in service expense is comprised of the following:
Year ended December 31,
2013
2012
2014
Cost of non-emergency transportation services ........................... $
Client service expense ..................................................................
Workforce development service expense .....................................
Total stock-based compenation in service expense ...................... $
587 $
6
3,432
4,025 $
1,054 $
604
-
1,658 $
1,354
792
-
2,146
The amounts above exclude the tax benefit of approximately $1,570, $909 and $960 for the years ended December 31,
2014, 2013 and 2012, respectively.
For the years ended December 31, 2014, 2013 and 2012, the amount of excess tax benefits resulting from the exercise
of stock options was approximately $2,722, $1,120 and $91, respectively. For the years ended December 31, 2014, 2013 and
2012, the Company had tax shortfalls resulting from the exercise of stock options of approximately $38, $683 and $306,
respectively. The excess tax benefits resulting from the exercise of stock options are reflected as cash flows from financing
activities for the years ended December 31, 2014, 2013 and 2012 in the consolidated statements of cash flows.
88
The following table summarizes the stock option activity for the year ended December 31, 2014:
Number
of Shares
Under
Option
Year ended December 31, 2014
Weighted-
Weighted-
average
Exercise
Price
average
Remaining
Contractual
Term
Aggregate
Intrinsic
Value
Balance at beginning of period......
Granted ......................................
Exercised ...................................
Forfeited or expired ...................
Outstanding at end of period .........
Vested or expected to vest at end
of period ....................................
Exercisable at end of period ..........
874,252 $
463,000
(512,927)
(10,703)
813,622 $
754,859 $
450,620 $
19.76
41.16
21.48
25.77
30.77
30.17
23.00
5.9 $
6.0 $
5.2 $
6,821
6,814
6,794
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, 2014, 2013 and 2012 were as follows:
Weighted-average grant date fair value .................................. $
Options exercised:
Total intrinsic value ............................................................ $
Cash received...................................................................... $
2014
Year ended December 31,
2013
17.09 Not Applicable $
2012
9,107 $
11,019 $
4,544 $
10,069 $
6.92
351
949
The following table summarizes the activity of the shares and weighted-average grant date fair value of the Company’s
non-vested restricted common stock during the year ended December 31, 2014:
Weighted-average
grant date
fair value
Shares
Non-vested at December 31, 2013 ...................................................
Granted .........................................................................................
Vested ...........................................................................................
Forfeited ......................................................................................
Non-vested at December 31, 2014 ...................................................
158,842 $
619,599 $
(74,714) $
(15,465) $
688,262 $
17.68
39.80
16.87
16.41
37.71
Restricted stock grants were not made prior to the approval of the 2006 Plan on May 25, 2006. The fair value of a non-
vested restricted stock grant is determined based on the closing market price of the Company’s common stock on the date of
grant.
As of December 31, 2014, there was approximately $22,272 of unrecognized compensation cost related to non-vested
share settled stock-based compensation arrangements granted under the 2006 Plan. The cost is expected to be recognized
over a weighted-average period of 2.74 years. The total fair value of shares vested was $7,053, $3,642 and $4,076 for the
years ended December 31, 2014, 2013 and 2012, respectively.
Additionally, as of December 31, 2014, the Company had a short-term liability of $1,357 in “Accrued expenses” and a
long-term liability of $176 in “Other long-term liabilities” in the consolidated balance sheet related to unexercised vested and
non-vested cash settled share-based payment awards granted under the 2006 Plan. The cash settled share-based compensation
expense in total excluded a tax benefit of approximately $610 for the year ended December 31, 2014. The cost is expected to
be recognized over a weighted average period of 0.96 years.
89
There were no stock options awarded during 2013. The fair value of each stock option awarded during the years ended
December 31, 2014 and 2012 was estimated on the date of grant using the Black-Scholes option-pricing formula and
amortized over the option’s vesting periods with the following assumptions:
Expected dividend yield ...................................................................................
Expected stock price volatility .........................................................................
Risk-free interest rate .......................................................................................
Expected life of options (in years) ...................................................................
Year ended December 31,
2012
2014
0.0%
0.0%
82.1%
45.6%-50.25%
0.4%-0.5%
1.1%-1.88%
3.3-3.6
3.25-5.47
The risk-free interest rate was based on the US Treasury security rate in effect as of the date of grant. The expected
lives of options and the expected stock price volatility were based on the Company’s historical data, or the Company’s best
estimate where appropriate.
In addition, in March 14, 2014, the Company issued 6,195 stock equivalent units (“SEUs”), which settle in cash, to
Coliseum Capital Partners, L.P., in lieu of a grant to Christopher Shackelton, Chairman of the Board of Directors, that 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 completed requisite service period. Also, on September 2014, the Company issued 200,000 stock option
equivalent units (“SARs”), which settle in cash, to Coliseum Capital Partners, L.P. that vest one-third upon grant, one-third
on June 30, 2015 and one-third on June 30, 2016. The Company recorded approximately $1,249 of expense in 2014 related
to the SARs which is included in “General and administrative expense” in the Consolidated Statements of Income. The fair
value of the SARs was estimated as of December 31, 2014 using the Black-Scholes option-pricing formula and amortized
over the option’s graded vesting periods with the following assumptions:
Expected dividend yield ...........................................................................................
Expected stock price volatility .................................................................................
Risk-free interest rate ...............................................................................................
Expected life of options (in years) ...........................................................................
Year ended December 31, 2014
0.0%
46.75% - 50.1%
1.3% - 1.76%
3.75 - 5.75
11. Earnings Per Share
The following table details the computation of basic and diluted earnings per share:
Year ended December 31,
2013
2014
2012
Numerator:
Net income available to common stockholders .............................. $
20,275 $
19,438 $
8,482
Denominator:
Denominator for basic earnings per share -- weighted-average
shares ..........................................................................................
14,765,303
13,499,885
13,225,448
Effect of dilutive securities:
Common stock options and restricted stock awards ...................
Performance-based restricted stock units ....................................
236,538
16,720
292,937
17,052
129,165
-
Denominator for diluted earnings per share -- adjusted weighted-
average shares assumed conversion ............................................
15,018,561
13,809,874
13,354,613
Basic earnings per share ..................................................................... $
Diluted earnings per share .................................................................. $
1.37 $
1.35 $
1.44 $
1.41 $
0.64
0.64
For the years ended December 31, 2014, 2013 and 2012, employee stock options to purchase 92,054, 452,421 and
1,563,247 shares, respectively, of common stock were not included in the computation of diluted earnings per share as the
exercise price of these options was greater than the average fair value of the common stock for the period and, therefore, the
effect of these options would have been anti-dilutive. The effect of issuing 1,139,145 and 1,179,999 shares of common stock
on an assumed conversion basis related to the Senior Notes was not included in the computation of diluted earnings per share
for the years ended December 31, 2013 and 2012, respectively, as it would have been antidilutive.
90
12. Non-Controlling Interest
In connection with the Company’s acquisition of WCG in August 2007, PSC of Canada Exchange Corp. (“PSC”), a
subsidiary established by the Company to facilitate the purchase of all of the equity interest in WCG, issued 287,576
exchangeable shares (“Exchangeable Shares”) as part of the purchase price consideration. The Exchangeable Shares were
valued at approximately $7,751 in accordance with the provisions of the purchase agreement ($7,649 for accounting
purposes). The Exchangeable Shares were exchangeable at each shareholder’s option, for no additional consideration, into
shares of the Company’s common stock on a one-for-one basis. Of the 287,576 Exchangeable Shares originally issued, 25,882
had been exchanged for Company common stock as of December 31, 2013.
The Exchangeable Shares were non-participating such that they were not entitled to any allocation of income or loss of
PSC. The Exchangeable Shares represented ownership in PSC and were accounted for as “Non-controlling interest” included
in stockholders’ equity in the consolidated balance sheets in the amount of approximately $6,961 at December 31, 2013.
The Exchangeable Shares and the 25,882 shares of the Company’s common stock issued upon the exchange of the same
number of Exchangeable Shares noted above were subject to a Settlement and Indemnification Agreement dated
November 17, 2009 (“Indemnification Agreement”) by and between the Company and the sellers of WCG. The
Indemnification Agreement secured the Company’s claims for indemnification and associated rights and remedies provided
by the Share Purchase Agreement (under which the Company acquired all of the equity interest in WCG on August 1, 2007)
arising from actions taken by British Columbia to strictly enforce a contractually imposed revenue cap on a per client basis
and contractually mandated pass-through activity subsequent to August 1, 2007. The actions taken by British Columbia
resulted in an approximate $3,000 Canadian Dollar (“CAD”) dispute and termination of one of its six provincial contracts
with WCG, which the Company is disputing. Under the Indemnification Agreement, the sellers agreed to transfer their rights
to the Exchangeable Shares and 25,882 shares of the Company’s common stock issued upon the exchange of the same number
of Exchangeable Shares to the Company to indemnify the Company against any losses suffered by the Company as the result
of an unfavorable ruling upon the conclusion of all appeals related to arbitration. Alternatively, at their option, the sellers
could pay cash in lieu of stock in satisfaction of their obligation under the Indemnification Agreement provided payment was
made before or concurrently with the execution of any settlement with British Columbia.
Effective April 14, 2010, an arbitrator issued an award with respect to the dispute between WCG and British Columbia.
Under the arbitration award, essentially all amounts disputed shall be paid to WCG (except for approximately CAD $13
which will be subject to the terms of the Indemnification Agreement) plus interest. The award affirmed the termination of
one of the six provincial contracts that had been terminated effective October 31, 2008. During the second quarter of 2010,
British Columbia filed a petition for leave to appeal the arbitration award, and on October 11, 2011, the leave to appeal was
granted to British Columbia.
In 2012, WCG received cash totaling approximately $3,394 from British Columbia related to the arbitral award.
However, in the event British Columbia prevailed in its arguments during the appeal process, British Columbia could seek
immediate repayment of the amount of the arbitral award owing at that time from WCG. Upon receipt of the cash discussed
above, the Company recorded approximately $3,394 to cash and other long-term liabilities in 2012. No changes in the status
of the appeal occurred and no additional payments were made during 2013.
During the second quarter of 2014, the Company and the sellers of WCG entered into Amendment No. 1 to a Settlement
and Indemnification Agreement which authorized WCG to enter into an agreement with the province of British Columbia,
Canada to settle the ongoing dispute. Additionally, the sellers of WCG agreed to reimburse WCG certain legal expenses up
to a maximum of approximately $120 CAD ($112) upon settlement with British Columbia. On June 6, 2014, British Columbia
agreed to the settlement of the dispute for approximately $1,500 CAD ($1,406), which was paid by WCG. The sellers of
WCG surrendered 39,162 exchangeable shares of PSC to fulfill their obligation to the Company for the settlement of the
dispute with British Colombia and the reimbursement of legal fees. These shares were converted to shares of the Company
and transferred to treasury. Additionally, the remaining 222,532 exchangeable shares of PSC were exchanged into shares of
common stock of the Company and distributed to the sellers of WCG, thus eliminating the related non-controlling interest
balance as of December 31, 2014.
13. Leases
The Company leases many of its operating and office facilities for various terms under non-cancelable operating lease
agreements. The leases expire in various years and 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.
91
The operating leases provide for increases in future minimum annual rental payments based on defined increases in the
Consumer Price Index, subject to certain minimum increases. Several of these lease agreements contain provisions for periods
in which rent payments are reduced. The total amount of rental payments due over the lease term is being charged to rent
expense on a straight-line basis over the term of the lease. The difference between rent expense recorded and the amount paid
as of December 31, 2014 and 2013 was approximately $2,280 and $1,355, respectively, and was included in "Other long-
term liabilities” as of December 31, 2014 in the consolidated balance sheets. Also, the lease agreements generally require the
Company to pay executory costs such as real estate taxes, insurance, and repairs.
Future minimum payments under non-cancelable operating leases for equipment and property with initial terms of one
year or more consisted of the following at December 31, 2014:
2015............................................................................................................................................................. $
2016.............................................................................................................................................................
2017.............................................................................................................................................................
2018.............................................................................................................................................................
2019.............................................................................................................................................................
Thereafter ....................................................................................................................................................
Total future minimum lease payments ........................................................................................................ $
28,628
22,042
13,365
8,128
4,888
7,513
84,564
Rent expense related to operating leases was approximately $30,588, $21,398 and $21,285, for the years ended
Operating
Leases
December 31, 2014, 2013 and 2012, respectively.
14. Retirement Plan
The Company maintains a qualified defined contribution plan under Section 401(k) of the Internal Revenue Code of
1986, as amended (“IRC”), for all employees of its NET Services and Human Services operating segments and corporate
personnel. The Company, at its discretion, may make a matching contribution to the plan. The Company’s contributions to
the plan were approximately $612, $501 and $461, for the years ended December 31, 2014, 2013 and 2012, respectively.
The Company also maintains defined contribution plans, for the benefit of eligible HA Services’ employees under the
provision of Section 401(k) of the US Internal Revenue Code. The Company provides matching contributions that vest over
3 years. Unvested matching contributions are forfeitable upon employee termination. Employee contributions are fully vested
and non-forfeitable. The Company’s contributions to these plans were approximately $299 for the year ended December 31,
2014.
WD Services’ employees are entitled to benefits from Ingeus’s retirement plans. Ingeus has separate plans in each
country it operates in and has both defined benefit plans and defined contribution plans. The defined contribution plans
receive fixed contributions from Ingeus companies and Ingeus’s legal or constructive obligation is limited to these
contributions. The Company’s contributions to these defined contribution plans were approximately $2,402 for the year ended
December 31, 2014.
On August 31, 2007, the Board adopted The Providence Service Corporation Deferred Compensation Plan (the
“Deferred Compensation Plan”) for the Company’s eligible employees and independent contractors of a participating
employer (as defined in the Deferred Compensation Plan). Under the Deferred Compensation Plan participants may defer all
or a portion of their base salary, service bonus, performance-based compensation earned in a period of 12 months or more,
commissions and, in the case of independent contractors, compensation reportable on Form 1099.
The Company also maintains a 409 (A) Deferred Compensation Rabbi Trust Plan for highly compensated employees
of its NET Services operating segment. 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.
92
15. Income Taxes
The federal and state income tax provision is summarized as follows:
Federal:
Current .............................................................................. $
Deferred ............................................................................
State:
Current .............................................................................. $
Deferred ............................................................................
Foreign:
Current .............................................................................. $
Deferred ............................................................................
2014
Year ended December 31,
2013
2012
9,386 $
(3,715)
5,671
3,940 $
(2,089)
1,851
(616) $
596
(20)
12,666 $
(2,805)
9,861
2,412 $
(478)
1,934
(19) $
1
(18)
6,909
(81)
6,828
2,124
85
2,209
(6)
(820)
(826)
Total provision for income taxes .......................................... $
7,502 $
11,777 $
8,211
A reconciliation of the provision for income taxes with amounts determined by applying the statutory U.S. federal
income tax rate to income before income taxes is as follows:
2014
Year Ended December 31,
2013
2012
Federal statutory rates ...........................................................
Federal income tax at statutory rates ..................................... $
Change in valuation allowance..............................................
Change in uncertain tax positions .........................................
State income taxes, net of federal benefit ..............................
Difference between federal statutory and foreign tax rate.....
Stock option expense .............................................................
Meals and entertainment .......................................................
Change in workers' compensation liability accural related to
ReDCo ...............................................................................
Amortization of deferred consideration.................................
Transaction costs ...................................................................
Contingent consideration liability reversal ............................
Nontaxable interest income ...................................................
Other..................................................................................
Provision for income taxes .................................................... $
Effective income tax rate .......................................................
35%
9,722 $
2,219
(1,681)
1,315
(353)
(524)
207
-
1,574
1,769
(5,748)
(660)
(338)
7,502 $
27%
35 %
10,925 $
185
-
1,198
15
(862 )
93
-
-
-
-
-
223
11,777 $
38 %
35%
5,844
181
-
1,436
384
605
67
(372)
-
-
-
-
66
8,211
49%
93
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,
2014
2013
Deferred tax assets:
Net operating loss carryforwards .......................................................................... $
Tax credit carryforwards.......................................................................................
Accounts receivable allowance .............................................................................
Property and equipment depreciation ...................................................................
Accrued items and reserves ..................................................................................
Nonqualified stock options ...................................................................................
Deferred rent ........................................................................................................
Deferred financing costs ......................................................................................
Deferred Revenue ................................................................................................
Other .....................................................................................................................
Deferred tax liabilities:
Prepaids ................................................................................................................
Property and equipment depreciation ...................................................................
Goodwill and intangibles amortization .................................................................
Other .....................................................................................................................
Net deferred tax liabilities ........................................................................................
Less valuation allowance .........................................................................................
Net deferred tax liabilities ........................................................................................ $
23,415 $
2,602
5,625
-
5,211
2,043
969
906
320
220
41,311
2,190
4,351
106,936
165
113,642
(72,331 )
(14,842 )
(87,173 ) $
Current deferred tax assets, net of valuation allowance of $3,501 and $436 for
2014 and 2013, respectively ................................................................................. $
6,066 $
Noncurrent deferred tax liabilities, net of valuation allowance of $11,341 and
$378 for 2014 and 2013, repectively ....................................................................
$
(93,239 )
(87,173 ) $
1,153
-
905
797
3,004
1,626
657
-
-
418
8,560
1,943
4,959
7,754
385
15,041
(6,481)
(814)
(7,295)
2,152
(9,447)
(7,295)
At December 31, 2014, the Company had approximately $19,756 of federal net operating loss carryforwards which
expire in years 2018 through 2034, and $70,497 of state net operating loss carryforwards which expire as follows:
2015 ....................................................................................................................................................... $
2016 .......................................................................................................................................................
2017 .......................................................................................................................................................
2018 .......................................................................................................................................................
2019 .......................................................................................................................................................
Thereafter ..............................................................................................................................................
$
240
2,147
1,989
-
-
66,121
70,497
In addition, the company had net operating loss carryforwards in Australia of $37,300 and in France of $5,400 which
can be carried forward indefinitely.
As a result of statutory “ownership changes” (as defined for purposes of Section 382 of the IRC), the Company’s ability
to utilize its federal net operating losses is restricted to $12,037 per year. Realization is dependent on generating sufficient
taxable income prior to expiration of the loss carryforwards. Although realization is not assured, management believes it is
more likely than not that all of the deferred tax assets will be realized, to the extent they are not covered by a valuation
allowance. The amount of the deferred tax asset considered realizable, however, could be reduced in the near term if estimates
of future taxable income during the carryforward period are reduced.
The net change in the total valuation allowance for the year ended December 31, 2014 was $14,028, including $10,930
from the acquisition of Ingeus and $879 from the acquisition of Matrix. The valuation allowance includes $12,688 for
Australia and France net operating loss carryforwards, and $2,154 for federal and state net operating loss and tax credit
94
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 adjusted, an appropriate adjustment will
be recorded.
The Company recognized certain excess tax benefits related to stock option plans for the years ended December 31,
2014, 2013 and 2012 in the amount of $2,706, $1,120 and $91, respectively. Such benefits were recorded as a reduction of
income taxes payable and an increase in additional paid-in-capital and are included in “Exercise of employee stock options”
in the accompanying statements of stockholders’ equity and comprehensive income.
The Company recognized a tax shortfall related to stock option plans for the years ended December 31, 2014, 2013 and
2012 in the amount of $22, $683 and $306, respectively. This was recorded as a reduction of deferred tax assets and a decrease
to additional paid-in-capital and is included in “Exercise of employee stock options” in the accompanying statements of
stockholders’ equity and comprehensive income.
The Company expects no material amount of the unrecognized tax benefits to be recognized during the next twelve
months. The Company recognizes interest and penalties as a component of income tax expense. During the years ended
December 31, 2014, 2013 and 2012, the Company recognized approximately $14, $76 and $8, respectively, in interest and
penalties. The Company had approximately $24 and $84 for the payment of penalties and interest accrued as of December 31,
2014 and 2013. A reconciliation of the liability for unrecognized income tax benefit is as follows:
2014
December 31,
2013
2012
Unrecognized tax benefits, beginning of year ........................ $
Balance upon acquisition .......................................................
Increase (decrease) related to prior year positions .................
Increase related to current year tax positions .........................
Settlements .............................................................................
Statute of limitations expiration .............................................
Unrecognized tax benefits, end of year .................................. $
414 $
2,432
14
160
-
(1,855)
1,165 $
254 $
82
78
-
-
414 $
324
(104)
58
(24)
-
254
The total amount of unrecognized tax benefits that, if recognized, would favorably affect the effective tax rate in future
periods was approximately $1,165 as of December 31, 2014.
The Company is subject to taxation in the United States and various foreign and state jurisdictions. The statute of
limitations is generally three years for the United States, 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: United States, United Kingdom, Australia, France, Saudi Arabia and Korea. The tax years that remain open for
examination by the United States and various foreign countries and states principally include the years 2010-2014.
Residual United States income taxes have not been provided on undistributed earnings of the Company’s foreign
subsidiaries. These earnings are considered to be indefinitely reinvested and, accordingly, no provision for United States
federal and state income taxes will be provided thereon. Upon distribution of those earnings in the form of dividends or
otherwise, the Company may be subject to both United States income taxes and withholding taxes payable to various foreign
jurisdictions less an adjustment for foreign tax credits. Because of the availability of U.S. foreign tax credits, it is not
practicable to determine the U.S. federal income tax liability that would be payable if such earnings were not reinvested
indefinitely.
16. Commitments and Contingencies
The Company is involved in various claims and legal actions arising in the ordinary course of business, many of which
are covered in whole or in part by insurance. Subsequent to December 31, 2014, the Company paid a settlement, not covered
by insurance, totaling $1,725, which was accrued as of December 31, 2014. The settlement was related to a review by one of
the Company’s Human Services’ payers of certain billing practices.
The Company has two deferred compensation plans for management and highly compensated employees. These
deferred compensation plans are 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 approximately
$1,432 and $1,485 at December 31, 2014 and 2013, respectively.
95
17. Transactions with Related Parties
Upon the Company’s acquisition of Maple Services, LLC in August 2005, the Company’s former Chief Executive
Officer, former Chief Financial Officer, and Chief Executive Officer of Human Services, became members of the board of
directors of the not-for-profit organization (Maple Star Colorado, Inc.) formerly managed by Maple Services, LLC. Current
members of Maple Star Colorado, Inc.’s board of directors include the Company’s Chief Executive Officer and Chief
Financial Officer, and the Chief Executive Officer of Human Services. Maple Star Colorado, Inc. is a non-profit member
organization governed by its board of directors and the state laws of Colorado in which it is incorporated. Maple Star
Colorado, Inc. is not a federally tax exempt organization and neither the Internal Revenue Service rules governing IRC
Section 501(c)(3) exempt organizations, nor any other IRC sections applicable to tax exempt organizations, apply to this
organization. The Company provided management services to Maple Star Colorado, Inc. under a management agreement for
consideration in the amount of approximately $311, $302 and $258 for the years ended December 31, 2014, 2013 and 2012,
respectively. Amounts due to the Company from Maple Star Colorado, Inc. for reimbursable expenses and management
services provided to it by the Company at December 31, 2014 and 2013 were approximately $489 and $220, respectively.
The Company operates a call center in Phoenix, Arizona. The building in which the call center is located was leased to
the Company from VWP McDowell, LLC (“McDowell”) until July 2014, at which time McDowell sold its interest in the
property. Certain immediate family members of the Chief Executive Officer of LogistiCare have a partial ownership interest
in McDowell. In the aggregate these family members own an approximately 13% interest in McDowell directly and indirectly
through a trust. For 2014, 2013 and 2012, the Company expensed approximately $234, $412 and $417, respectively, in lease
payments to McDowell.
On October 23, 2014, we issued to Coliseum Capital Management, LLC and certain of its affiliates (“Coliseum”), a
related party, a 14.0% Unsecured Subordinated Note in aggregate principal amount of $65,500 (the “Note”). Interest from
the issuance date to, but excluding, the 120th day after the issuance date, was paid in cash in the amount of $3,015 on the
issuance of the Note. Coliseum held approximately 15% of our outstanding common stock as of October 23, 2014 and is our
largest shareholder. Additionally, Christopher Shackelton, who serves as our Chairman of the board of directors, is also a
Managing Partner at Coliseum Capital Management, LLC.
The Note was repaid in full on February 11, 2015, with the proceeds from a registered Rights Offering (“Rights
Offering”) and related standby purchase commitment described below, which allowed 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
of $100.00 per share, as further described below. As such, the Note was classified as a current liability at December 31, 2014.
In connection with the anticipated Rights Offering, on October 23, 2014, the Company entered into a standby purchase
agreement (the “Standby Purchase Agreement”) with Coliseum, pursuant to which Coliseum agreed to purchase, substantially
simultaneously with the completion of the Rights Offering, in the aggregate, all of the available preferred stock not otherwise
sold in the Rights Offering following the exercise of the subscription privileges of holders of the Company’s common stock.
As consideration for entering into the Standby Purchase Agreement, on October 23, 2014, the Company paid Coliseum a fee
of $2,947, which is included in “Prepaid expenses and other” in the consolidated balance sheet at December 31, 2014. In
addition Coliseum had the additional right, exercisable within 30 days following the completion of the Rights Offering, to
purchase additional preferred stock valued at $15,000 at a price per share equal to 105% of the Subscription Price, which was
exercised on March 12, 2015.
18. Acquisitions
Ingeus
On May 30, 2014, the Company acquired all of the outstanding equity of Ingeus. The purchase price was comprised of
(i) a GBP £35,000, plus adjustments, cash payment on May 30, 2014 ($92,279, after increase for customary adjustments),
(ii) contingent consideration of up to GBP £75,000 ($125,978), payable over a five year period, based on the achievement of
certain Ingeus milestones including the achievement of certain levels of Ingeus’s earnings before interest, taxes, depreciation
and amortization and other defined criteria and (iii) contingent consideration of £5,000 ($8,399) upon successful award of a
specified customer contract. In addition, on May 30, 2014, the Company issued restricted shares of the Company’s common
stock and payment of cash to the former shareholders of Ingeus with a combined value of GBP £14,346 ($24,097), subject
to a vesting schedule of 25% per year over a four year period which is accounted for as a compensatory arrangement. The
foreign currency translations above were based on the conversion rate on May 30, 2014.
96
Ingeus has operations in 10 countries and four continents. It is a workforce development and outsourced services
company and a market leader in outsourced employability programs, operating in the social improvement, employment,
offender rehabilitation and welfare services markets. The acquisition expands the Company’s presence into international
markets, diversifies its customer base, and enhances its workforce development expertise globally.
The Company incurred acquisition and related costs for this acquisition of $4,311 during the year ended December 31,
2014, respectively, which are included in “General and administrative expenses.”
The final purchase price of Ingeus is calculated as follows:
Cash purchase of common stock ........................................................................................................... $
Adjustment amount (1) .........................................................................................................................
Fair value of contingent consideration ..................................................................................................
Total purchase price .......................................................................................................................... $
The table below presents Ingeus’s net assets based upon final assessment of their respective fair values:
Cash ........................................................................................................................................................... $
Accounts receivable ..................................................................................................................................
Other current assets ...................................................................................................................................
Property and equipment ............................................................................................................................
Intangibles .................................................................................................................................................
Goodwill (2) ..............................................................................................................................................
Current liabilities .......................................................................................................................................
Other non-current liabilities ......................................................................................................................
Total ...................................................................................................................................................... $
92,279
2,180
29,893
124,352
37,159
34,125
14,343
10,501
65,700
35,484
(49,026)
(23,934)
124,352
(1) Includes final working capital and other closing account true-ups.
(2) The goodwill was allocated to the Company's WD Services segment. The goodwill is not expected to be deductible for
tax purposes. Goodwill includes the value of the purchased assembled workforce.
The fair value of intangible assets is as follows:
Customer relationships ..................................................
Trademarks and trade names .........................................
Developed technology ...................................................
*Weighted-average amortization period
Matrix
Type
Amortizable
Amortizable
Amortizable
Life ( in Years)
Value
10
10
5
9.7*
$
$
43,700
18,000
4,000
65,700
On October 23, 2014, the Company acquired all of the outstanding equity of CCHN Group Holdings, Inc. (“CCHN”),
the parent company of Community Care Health Network, Inc. (dba Matrix Medical Network ), pursuant to an Agreement
and Plan of Merger (the “Merger Agreement”), dated as of September 17, 2014, referred to herein as the Matrix Acquisition.
Pursuant to the Merger Agreement, the Company paid consideration of $352,147 in cash (including working capital
adjustments) and 946,723 shares of the Company’s common stock (with an aggregate value of $40,000 based on the closing
price of the Company’s common stock on the NASDAQ Stock Market on September 17, 2014). Pursuant to the Merger
Agreement, at the Closing, subject to the escrow arrangements described in the Merger Agreement, each share of CCHN then
outstanding immediately prior to the closing and each vested stock option of CCHN then outstanding immediately prior to
the closing was converted into the right to receive the merger consideration described above. The cash required to complete
the Matrix Acquisition and fund certain related expenses was derived from (1) the cash proceeds from the new $250,000 term
loan under the Second Amendment to the Credit Agreement (as discussed above), (2) the cash proceeds from an
approximately $23,400 draw down from the Company’s revolving credit facility, (3) the cash proceeds from the issuance of
the Note (as discussed above) and (4) approximately $48,000 of cash on hand. The cash consideration paid for CCHN is
subject to certain customary adjustments for working capital purposes.
97
Matrix is a provider of CHAs for MA health plans and risk bearing providers with a national footprint across 33 states.
The acquisition expands the Company's clinical capabilities and home based services with the addition of operations which
include approximately 800 nurse practitioners at December 31, 2014.
The Company incurred acquisition and related costs for this acquisition of $7,360 during year ended December 31,
2014, which are included in “General and administrative expenses.”
The preliminary purchase price of Matrix is calculated as follows:
Cash purchase of common stock (including working capital adjustment) ............................................ $
Equity consideration (valued using October 23, 2014 stock price) .......................................................
Total estimated purchase price .......................................................................................................... $
352,147
38,569
390,716
The table below presents Matrix’s net assets based upon a preliminary estimate of their respective fair values:
Accounts receivable (1) ............................................................................................................................. $
Other current assets ...................................................................................................................................
Property and equipment ............................................................................................................................
Intangibles .................................................................................................................................................
Goodwill (2) ..............................................................................................................................................
Other non-current assets ............................................................................................................................
Deferred taxes, net ....................................................................................................................................
Accounts payable and accrued liabilities ..................................................................................................
Other non-current liabilities ......................................................................................................................
Total ...................................................................................................................................................... $
22,108
11,371
5,099
247,300
210,576
3,953
(83,677)
(25,460)
(554)
390,716
(1) The fair value of trade accounts receivable acquired in this transaction was determined to be approximately $22,108. The
gross amount due with respect to these receivables is approximately $23,307, of which approximately $1,199 is expected
to be uncollectible.
(2) The goodwill was allocated to the Company's HA Services segment. Goodwill totaling $995 is expected to be deductible
for tax purposes. Goodwill includes the value of the purchased assembled workforce.
The above fair value estimates represent the preliminary fair value estimates as the valuation of intangible assets has
not been finalized.
Life (in Years)
N/A
10
5
9.1*
$
$
Value
25,900
181,100
40,300
247,300
The preliminary fair value of intangible assets is as follows:
Trademarks and trade names ............................................
Customer relationships .....................................................
Developed technology ......................................................
Type
Indefinite Lived
Amortizable
Amortizable
*Weighted-average amortization period for intangible assets with definite lives
98
Pro forma information
The amounts of Ingeus’s and Matrix’s revenue and net income included in the Company’s condensed consolidated
statements of income for the year ended December 31, 2014, and the unaudited pro forma revenue and net income of the
combined entity had the acquisition date been January 1, 2013, are:
Year ended December 31,
2013
2014
Actual Ingeus:
Revenue ............................................................................................................ $
Net income ....................................................................................................... $
Actual Matrix:
Revenue ............................................................................................................ $
Net income ....................................................................................................... $
179,307 $
13,936 $
43,331 $
1,348 $
-
-
-
-
Proforma:
Revenue ............................................................................................................ $
Net income ....................................................................................................... $
Diluted earnings per share ................................................................................ $
1,801,696 $
43,868 $
2.74 $
1,636,248
20,103
1.31
The pro forma information above for the year ended December 31, 2014 includes the elimination of acquisition related
costs. Adjustments for all periods include compensation and stock-based compensation expense related to employment
agreements effective upon consummation of the acquisitions, additional interest expense on the debt issued to finance the
acquisitions, amortization and depreciation expense based on the estimated fair value and useful lives of intangible assets and
property and equipment and related tax effects. The pro forma financial information is not necessarily indicative of the results
of operations that would have occurred had the transaction been affected on January 1, 2013.
Additionally, during the second and fourth quarters of 2014, the Company acquired two human services businesses
through asset purchase agreements. The Company has not disclosed purchase information or the pro forma impact of these
acquisitions as it is immaterial to the Company’s financial position and results of operations.
19. Business Segments
The Company’s operations are organized and reviewed by management along its service lines. Historically, the
Company has operated in two segments, Human Services and NET Services. With the acquisitions of Ingeus and Matrix in
the second and fourth quarters of 2014, respectively, the Company created two additional segments, WD Services and HA
Services. Human Services includes government sponsored home and community based counseling, foster care and not-for-
profit management services. NET Services includes managing the delivery of non-emergency transportation services. WD
Services includes workforce development and outsourced employability programs and HA Services provides CHAs for MA
health plans in enrolled members’ homes or nursing facilities.
Segment asset disclosures include property and equipment and other intangible assets. The accounting policies of the
Company’s segments are substantially the same as those of the consolidated Company. The Company evaluates performance
based on operating income. Operating income is revenue less operating expenses (including cost of non-emergency
transportation services, client service expense, cost of workforce development services, cost of health assessment services,
general and administrative expense, depreciation and amortization, and asset impairment charges) and is not affected by other
income/expense or by income taxes. Other income/expense consists principally of interest expense, loss on extinguishment
of debt and interest income. In calculating operating income for each segment, general and administrative expenses incurred
at the corporate level are allocated to each segment based upon their relative direct expense levels excluding costs for
purchased services. Corporate costs include corporate executive management, corporate accounting and finance, information
technology, external audit, tax compliance, business development, cost reporting compliance, internal audit, employee
training, legal and various other overhead costs. Corporate depreciation is allocated to operating segments, however, the
related property and equipment are not allocated. All intercompany transactions have been eliminated.
99
The following table sets forth certain financial information attributable to the Company’s business segments for the
years ended December 31, 2014, 2013 and 2012. In addition, none of the segments have significant non-cash items other than
asset impairment charges and depreciation and amortization charges in operating income.
For the year ended December 31, 2014
NET
Services
Human
Services
(b)
WD
HA
Services Services
Corporate
(a)
Consolidated
Total
Revenues ....................................... $ 884,287 $
7,699
Depreciation and amortization ......
56,804
Operating income ..........................
4,002
Net interest expense ......................
279,633
Total assets ....................................
12,477
Long-lived asset expenditures .......
374,245 $
8,268
(19,597)
(279)
171,456
13,451
179,308 $
7,902
5,990
2,205
176,134
104,572
43,331 $
5,619
(857)
8,672
506,069
459,991
- $
-
-
-
31,953
1,981
1,481,171
29,488
42,340
14,600
1,165,245
592,472
For the year ended December 31, 2013
NET
Services
Human
Services
(b)
WD
HA
Services Services
Corporate
(a)
Consolidated
Total
Revenues ....................................... $ 770,246 $
7,725
Depreciation and amortization ......
37,994
Operating income ..........................
6,698
Net interest expense ......................
260
Loss on extinguishment of debt ....
247,666
Total assets ....................................
5,308
Long-lived asset expenditures .......
352,436 $
7,147
640
196
265
140,964
2,538
- $
-
-
-
-
-
-
- $
-
-
-
-
-
-
- $
-
-
-
-
36,128
3,326
1,122,682
14,872
38,634
6,894
525
424,758
11,172
For the year ended December 31, 2012
NET
Services
Human
Services
(b)
WD
HA
Services Services
Corporate
(a)
Consolidated
Total
Revenues ....................................... $ 750,658 $
7,615
Depreciation and amortization ......
23,494
Operating income ..........................
7,569
Net interest expense (income) .......
216,698
Total assets ....................................
6,271
Long-lived asset expenditures .......
355,231 $
7,408
707
(61)
145,770
2,489
- $
-
-
-
-
-
- $
-
-
-
-
-
- $
-
-
-
29,269
762
1,105,889
15,023
24,201
7,508
391,737
9,522
(a) Corporate costs have been allocated to the four operating segments.
(b) Excludes intersegment revenues of approximately $300, $326 and $378 for the years ended December 31, 2014, 2013 and
2012, respectively, that have been eliminated in consolidation.
The following table details the Company’s revenues, net income and long-lived assets by geographic location.
Revenue ................................................................................ $ 1,290,709 $
47,614
Long-lived assets (c) ............................................................
139,065 $
7,292
For the year ended December 31, 2014
United
United
States (a) Kingdom
Other
Foreign
Consolidated
Total
1,481,171
57,148
51,397 $
2,242
Revenue ................................................................................ $ 1,112,120 $
32,279
Long-lived assets (c) ............................................................
United
For the year ended December 31, 2013
Other
United
States (a) Kingdom Foreign (b)
10,562 $
430
- $
-
Consolidated
Total
1,122,682
32,709
100
Revenue ................................................................................ $ 1,091,778 $
29,692
Long-lived assets (c) ............................................................
United
For the year ended December 31, 2012
Other
United
States (a) Kingdom Foreign (b)
14,111 $
688
- $
-
Consolidated
Total
1,105,889
30,380
(a) Additionally, both segments, on an aggregate basis, derived approximately 10.1%, 10.5% and 10.3% of the
Company’s consolidated revenue from the State of New Jersey for the years ended December 31, 2014, 2013
and 2012, respectively.
(b) Consists of Canadian operations.
(c) Represents property and equipment, net.
20. Quarterly Results (Unaudited)
Quarter ended
March 31,
2013
June 30,
2013
September 30, December 31,
Revenues ............................................. $
Operating income ................................
Net income .........................................
Earnings per share:
Basic ................................................ $
Diluted ............................................. $
281,487 $
13,105
6,678
0.51 $
0.49 $
287,637 $
11,453
5,876
0.44 $
0.43 $
Quarter ended
2013
276,713 $
7,976
3,527
2013
276,845
6,100 (1)
3,357 (1)(2)
0.26 $
0.25 $
0.24
0.24
March 31,
2014
June 30,
2014 (4)
September 30,
2014
December 31,
2014 (6)
Revenues .......................................... $
Operating income ............................. $
Net income ....................................... $
Earnings per share:
Basic ............................................. $
Diluted .......................................... $
289,403
$
12,120(3) $
6,287(3) $
343,953
$
13,524(3) $
6,672 (3) $
394,218
$
1,673(3)(5) $
266 (3)(5) $
453,597
15,023 (3)(7)
7,050 (3)(7)
0.45
0.44
$
$
0.47
0.46
$
$
0.02
0.02
$
$
0.46
0.45
(1) The fourth quarter of 2013 includes a charge of approximately $1,277 for severance and related payments (net of the
benefit of forfeiture of stock based compensation) for two executive officers and one key employee.
(2) The tax provision in the fourth quarter of 2013 included a favorable tax adjustment for the tax treatment of certain equity
compensation expenses resulting in a quarterly effective income tax rate of 25.8%.
(3) Includes acquisition costs of approximately $1,829, $2,496, $3,686 and $3,827, for the quarters ending March 31, 2014,
June 30, 2014, September 30, 2014 and December 31, 2014, respectively.
(4) The Company purchased Ingeus on May 30, 2014. Ingeus operations were included beginning in the second quarter of
2014.
(5) Includes approximately $3,294 of compensation expense related to the immediate vesting of certain equity based
compensation awards granted in the third quarter of 2014.
(6) The Company purchased Matrix on October 23, 2014. Matrix operations were included beginning in the fourth quarter
of 2014.
(7) Includes a gain due to a change in the estimated fair value of contingent consideration of $16,314.
101
21. Subsequent Events
As discussed further in Note 8, the Company completed a Rights Offering, on February 5, 2015, allowing all of the
Company’s existing common stock holders the non-transferrable right to purchase their pro rata share of $65,500 of
convertible preferred stock at a price equal to $100.00 per share. The convertible preferred stock is convertible into shares of
Providence’s common stock at a conversion price equal to $39.88, 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 convertible preferred stock.
Pursuant to the terms and conditions of the Standby Purchase Agreement between Coliseum Capital Partners, L.P., Coliseum
Capital Partners II, L.P., Coliseum Capital Co-Invest, L.P. and Blackwell Partners, LLC (collectively, the "Standby
Purchasers") and the Company, the remaining 524,116 shares the Company's preferred stock was purchased by Standby
Purchasers at the $100.00 per share subscription price. The Standby Purchasers beneficially own approximately 94% of the
Company's outstanding convertible preferred stock after giving effect to the Rights Offering and the Standby Purchase
Agreement. The Company received $65,500 in aggregate gross proceeds from the consummation of the Rights Offering and
Standby Purchase Agreement, which it used on February 11, 2015 to repay the unsecured subordinated bridge note entered
into with the Standby Purchasers to finance a portion of the Matrix acquisition.
Additionally, on March 12, 2015, the Standby Purchasers exercised their right to purchase an additional 150,000 shares
of the Company’s convertible preferred stock.
The Company may pay a noncumulative cash dividend on each share of convertible preferred stock, when, as and if
declared by its board of directors, at the rate of five and one-half percent (5.5%) per annum on the liquidation preference then
in effect. Following the issue date of the convertible preferred stock, on or before the third business day immediately
preceding each fiscal quarter, the Company will determine our intention whether or not to pay a cash dividend with respect
to that ensuing quarter and will give notice of our intention to each holder of convertible preferred stock as soon as practicable
thereafter.
In the event the Company does not declare and pay a cash dividend, the liquidation preference will be increased to an
amount equal to the liquidation preference in effect at the start of the applicable dividend period, plus an amount equal to
such then applicable liquidation preference multiplied by eight and one-half percent (8.5%) per annum, computed on the
basis of a 365-day year and the actual number of days elapsed from the start of the applicable dividend period to the applicable
date of determination.
Cash dividends will be payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year,
commencing on the first calendar day of the first January, April, July or October following the date of original issuance of
the convertible preferred stock, and, if declared, will begin to accrue on the first day of the applicable dividend period. Paid
in kind (“PIK”) dividends, if applicable, will accrue and be cumulative on the same schedule as set forth above for cash
dividends and will also be compounded at the applicable annual rate on each applicable subsequent dividend date. PIK
dividends are paid upon the occurrence of a liquidation event, conversion or redemption in accordance with the terms of the
convertible preferred stock.
Item 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
(a) Evaluation of disclosure controls and procedures
The Company, under the supervision and with the participation of its management, including its principal executive
officer and principal financial officer, evaluated the effectiveness of the design and operation of its disclosure controls and
procedures, as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the
end of the period covered by this report (December 31, 2014) (“Disclosure Controls”). The scope of management’s
assessment of the effectiveness of internal control over financial reporting includes all of our businesses except for Ingeus
and Matrix, which were acquired on May 30, 2014 and October 23, 2014, respectively, and whose combined financial
statements represent 11.8% of total assets and 15.0% of revenues as of and for the year ended December 31, 2014. See Note
18 to the accompanying consolidated financial statements for further discussion of these acquisitions. Based upon the
Disclosure Controls evaluation, the principal executive officer and principal financial officer have concluded that the
102
Disclosure Controls are effective in reaching a reasonable level of assurance that (i) information required to be disclosed by
the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission’s rules and forms and (ii) information required
to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and
communicated to the Company’s management, including its principal executive and principal financial officers, or persons
performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in internal controls
The principal executive officer and principal financial officer also conducted an evaluation of the Company’s internal
control over financial reporting (“Internal Control”) to determine whether any changes in Internal Control occurred during
the quarter ended December 31, 2014 that have materially affected or which are reasonably likely to materially affect Internal
Control. Based on that evaluation, other than changes relating to the acquisitions of Ingeus and Matrix, there has been no
such change during the quarter ended December 31, 2014.
(c) Limitations on the Effectiveness of Controls
Control systems, no matter how well conceived and operated, are designed to provide a reasonable, but not an absolute,
level of assurance that the objectives of the control system are met. Further, the design of a control system must reflect the
fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the
inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and
instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective
control system, misstatements due to error or fraud may occur and not be detected. The Company conducts periodic
evaluations of its internal controls to enhance, where necessary, its procedures and controls.
(d) Management’s report on internal control over financial reporting
Management’s report on internal control over financial reporting is presented in Part II, Item 8, of this report and is
hereby incorporated by reference.
(e) Audit report of the independent registered public accounting firm
The audit report of the independent registered public accounting firm is presented in Part II, Item 8, of this report and
is hereby incorporated by reference.
Item 9B. Other Information.
None.
103
Item 10. Directors, Executive Officers and Corporate Governance.
PART III
This Item is incorporated by reference to our definitive proxy statement on Schedule 14A for our 2015 stockholder
meeting; provided that if such proxy statement is not filed on or before April 30, 2015, such information will be included in
an amendment to this Report on Form 10-K filed on or before such date.
Code of Ethics
We have adopted a code of ethics that applies to our senior management, including our chief executive officer, chief
financial officer, controller and persons performing similar functions. Copies of our code of ethics are available without
charge upon written request directed to Ann Mullen, Ethics Program Manager, at The Providence Service Corporation, 64
East Broadway Blvd., Tucson, AZ, 85701.
Item 11. Executive Compensation.
This Item is incorporated by reference to our definitive proxy statement on Schedule 14A for our 2015 stockholder
meeting; provided that if such proxy statement is not filed on or before April 30, 2015, such information will be included in
an amendment to this Report on Form 10-K filed on or before such date.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
This Item is incorporated by reference to our definitive proxy statement on Schedule 14A for our 2015 stockholder
meeting; provided that if such proxy statement is not filed on or before April 30, 2015, such information will be included in
an amendment to this Report on Form 10-K filed on or before such date.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
This Item is incorporated by reference to our definitive proxy statement on Schedule 14A for our 2015 stockholder
meeting; provided that if such proxy statement is not filed on or before April 30, 2015, such information will be included in
an amendment to this Report on Form 10-K filed on or before such date.
Item 14. Principal Accounting Fees and Services.
This Item is incorporated by reference to our definitive proxy statement on Schedule 14A for our 2015 stockholder
meeting; provided that if such proxy statement is not filed on or before April 30, 2015, such information will be included in
an amendment to this Report on Form 10-K filed on or before such date.
104
Item 15. Exhibits, Financial Statement Schedules.
(a)(1) Financial Statements
PART IV
The following consolidated financial statements including footnotes are included in Item 8.
• Consolidated Balance Sheets at December 31, 2014 and 2013;
• Consolidated Statements of Income for the years ended December 31, 2014, 2013 and 2012;
• Consolidated Statements of Comprehensive Income for the years ended December 31, 2014, 2013 and 2012;
• Consolidated Statements of Stockholders’ Equity at December 31, 2014, 2013 and 2012; and
• Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012.
(2) Financial Statement Schedules
105
Schedule II Valuation and Qualifying Accounts
Additions
Balance at
beginning Charged to Charged to
costs and
period expenses accounts
other
of
Balance at
end of
period
Deductions
Year Ended December 31, 2014:
Allowance for doubtful accounts ................ $ 4,217,921 $ 2,588,188 $ 4,050,943 (1) $ 4,823,389 (2) $ 6,033,663
14,842,061
Deferred tax valuation allowance ...............
813,836 2,219,300 11,808,925 (3)
-
Year Ended December 31, 2013:
Allowance for doubtful accounts ................ $ 3,684,859 $ 2,990,850 $ 3,467,114 (1) $ 5,924,902 (2) $ 4,217,921
813,836
Deferred tax valuation allowance ...............
629,137
184,699
-
-
Year Ended December 31, 2012:
Allowance for doubtful accounts ................ $ 5,834,743 $ 2,856,156 $ 2,741,315 (1) $ 7,747,355 (2) $ 3,684,859
629,137
Deferred tax valuation allowance ...............
448,567
180,570
-
-
Notes:
(1) Amounts primarily include the allowance for contractual adjustments related to our non-emergency transportation
services operating segment that are recorded as adjustments to non-emergency transportation services revenue as well
as certain reclassifications within the “Accounts Receivable” line item of the consolidated balance sheets made to
conform with the current period presentation of the allowance for doubtful accounts in this schedule related to our
correctional services business. Item also includes beginning balances related to acquired entities.
(2) Write-offs, net of recoveries
(3) Includes beginning balances for acquired entities.
All other schedules are omitted because they are not applicable or the required information is shown in our financial
statements or the related notes thereto.
(3) Exhibits
Exhibit
Number
2.1(19)
2.2(19)
2.3(21)
3.1(1)
Description
Share Sale Agreement, dated as of March 31, 2014, by and among The Providence Service Corporation,
Pinnacle Australia Holdco Pty Ltd, Thérèse Virginia Rein, Gregory Kenneth Ashmead and GK
Ashmead Holdings Pty Limited (as trustee of the GK Ashmead Nominees Trust).
Australian Share Sale Agreement Side Deed, dated as of March 31, 2014, by and among Providence,
Pinnacle Australia Holdco Pty Ltd, Thérèse Virginia Rein, Gregory Kenneth Ashmead, GK Ashmead
Holdings Pty Limited (as trustee of the GK Ashmead Nominees Trust) and Deloitte LLP.
Agreement and Plan of Merger, dated as of September 17, 2014 by and among The Providence Service
Corporation, Matrix Acquisition Co., CCHN Group Holdings, Inc. and the Holders' Representative
named therein.
Second Amended and Restated Certificate of Incorporation of The Providence Service Corporation,
including Certificate of Designation of Series A Junior Participating Preferred Stock, as filed with the
Secretary of State of Delaware on December 9, 2011.
3.2(2)
Amended and Restated Bylaws of The Providence Service Corporation, effective March 10, 2010.
106
3.3(17)
4.1(3)
Certificate of Elimination of Series A Junior Participating Preferred Stock of the Providence Service
Corporation, dated as of March 27, 2014.
Convertible Senior Subordinated Note Indenture, dated November 13, 2007, between The Providence
Service Corporation and The Bank of New York Trust Company, N.A., as Trustee.
4.2(4)
Form of Note (included as Exhibit A to the Indenture, listed as Exhibit 4.1 hereto).
4.3(5)
4.4(17)
Amended and Restated Rights Agreement, dated as of December 9, 2011, by and between The
Providence Service Corporation and Computershare Trust Company, N.A., as Rights Agent.
Amendment and Termination of Rights Agreement, dated as of March 27, 2014, by and between The
Providence Service Corporation and Computershare Trust Company, N.A., as Rights Agent.
+10.1(6)
The Providence Service Corporation Stock Option and Incentive Plan, as amended.
+10.2(7)
2003 Stock Option Plan, as amended.
+10.3(8)
The Providence Service Corporation 2006 Long-Term Incentive Plan, as amended.
+10.4(9)
Amended and Restated Providence Service Corporation Deferred Compensation Plan.
10.5(3)
10.6(13)
10.7(13)
10.8(13)
10.9(20)
10.10(22)
10.11(22)
10.12(22)
+10.13(10)
+10.14(15)
Registration Rights Agreement, dated November 13, 2007, by and among The Providence Service
Corporation and the Purchasers named therein.
Amended and Restated Credit and Guaranty Agreement dated as of August 2, 2013 among The
Providence Service Corporation, Bank of America, N.A. SunTrust Bank, BMO Harris Bank, Merrill
Lynch, Pierce, Fenner & Smith Incorporated and SunTrust Robinson Humphrey, Inc.
Amended and Restated Pledge Agreement dated as of August 2, 2013 by and among The Providence
Service Corporation (including its subsidiaries) and Bank of America, N.A., as administrative agent.
Amended and Restated Security Agreement, dated as of August 2, 2013, by and among The Providence
Service Corporation (including its subsidiaries) and Bank of America, N.A., as administrative agent.
First Amendment to Amended and Restated Credit and Guaranty Agreement and Consent, dated as of
May 28, 2014, among The Providence Service Corporation, the Guarantors named therein, the New
Subsidiaries named therein, Bank of America, N.A., the Lenders named therein and HSBC Bank USA,
National Association.
Second Amendment, dated as of October 23, 2014, to the Amended and Restated Credit and Guaranty
Agreement, dated as of August 3, 2012by and among The Providence Service Corporation, the
Guarantors stated therein, Bank of America, N.A., SunTrust Bank, Royal Bank of Canada, BMO Harris
Bank, N.A., HSBC Bank USA, National Association, the other Lenders named therein, the New Lenders
named therein, Merrill Lynch, Pierce, Fenner & Smith Incorporated, SunTrust Robinson Humphrey,
Inc., and RBC Capital Markets.
14.0% Unsecured Subordinated Note, dated October 23, 2014, by and among The Providence Service
Corporation, Coliseum Capital Partners, L.P., Coliseum Capital Partners II, L.P., Coliseum Capital Co-
Invest, L.P., and Blackwell Partners, LLC.
Standby Purchase Agreement, dated October 23, 2014, by and among The Providence Service
Corporation, Coliseum Capital Partners, L.P., Coliseum Capital Partners II, L.P., Coliseum Capital Co-
Invest, L.P., and Blackwell Partners, LLC.
Amended and Restated Employment Agreement dated May 17, 2011 between The Providence Service
Corporation and Fred D. Furman.
Separation and General Release Agreement dated December 31, 2013 between The Providence Service
Corporation and Fred D. Furman.
107
+10.15(10)
+10.16(12)
+10.17(14)
+10.18(16)
+10.18(18)
+10.19(20)
Amended and Restated Employment Agreement dated May 17, 2011 between The Providence Service
Corporation and Craig A. Norris.
Employment Agreement dated May 7, 2013 between The Providence Service Corporation and Warren
S. Rustand.
Employment Agreement dated September 13, 2013 between The Providence Service Corporation and
Robert E. Wilson.
Letter Agreement dated March 14, 2014, amending the Amended and Restated Employment Agreement,
dated May 17, 2011 between The Providence Service Corporation and Craig A. Norris.
Employment Agreement dated March 24, 2014 between The Providence Service Corporation and
Herman Schwarz.
Executive Service Agreement, dated as of April 10, 2014, by and between Ingeus Europe Limited and
Thérèse Rein.
+10.20(11)
Form of Restricted Stock Agreements, as amended.
+10.21(11)
Form of Stock Option Agreements.
+10.22(11)
Form of 2011 Performance Restricted Stock Unit Agreements.
+10.23(1)
Form of 2012 Performance Restricted Stock Unit Agreements.
+10.24(12)
Form of 2013 Performance Restricted Stock Unit Agreements.
*12.1
Statement re Computation of Ratios of Earnings to Fixed Charges.
*21.1
Subsidiaries of the Registrant.
*23.1
Consent of KPMG LLP.
*31.1
*31.2
*32.1
*32.2
Certification pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 of the Chief Executive
Officer.
Certification pursuant to Securities Exchange Act Rules 13a-14 and 15d-14 of the Chief Financial
Officer.
Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, of the Chief Executive Officer.
Certification pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-
Oxley Act of 2002, of the Chief Financial Officer.
101. INS
XBRL Instance Document
101.SCH
XBRL Schema Document
101.CAL
XBRL Calculation Linkbase Document
101.LAB
XBRL Label Linkbase Document
101.PRE
XBRL Presentation Linkbase Document
101.DEF
XBRL Definition Linkbase Document
108
+ Management contract or compensatory plan or arrangement.
*
Filed herewith
(1) Incorporated by reference from an exhibit to the registrant’s annual report on Form 10-K for the year ended
December 31, 2011 filed with the Securities and Exchange Commission on March 15, 2012.
(2) Incorporated by reference from an exhibit to the registrant’s annual report on Form 10-K for the year ended
December 31, 2009 filed with the Securities and Exchange Commission on March 12, 2010.
(3) Incorporated by reference from an exhibit to the registrant’s current report on Form 8-K filed with the Securities and
Exchange Commission on November 15, 2007.
(4) Incorporated by reference from an exhibit to the registrant’s current report on Form 8-K filed with the Securities and
Exchange Commission on November 7, 2007.
(5) Incorporated by reference from an exhibit to the registrant’s current report on Form 8-K filed with the Securities and
Exchange Commission on December 9, 2011.
(6) Incorporated by reference from an exhibit to the registrant’s registration statement on Form S-1 (Registration No. 333-
106286) filed with the Securities Exchange Commission on June 19, 2003.
(7) Incorporated by reference from an exhibit to the registrant’s quarterly report on Form 10-Q for the quarter ended June 30,
2005 filed with the Securities and Exchange Commission on August 9, 2005.
(8) Incorporated by reference from an appendix to the registrant’s definitive proxy statement on Schedule 14A filed with
the Securities and Exchange Commission on April 20, 2011.
(9) Incorporated by reference from an exhibit to the registrant’s annual report on Form 10-K for the year ended
December 31, 2009 filed with the Securities and Exchange Commission on March 11, 2011.
(10) Incorporated by reference from an exhibit to the registrant’s current report on Form 8-K filed with the Securities and
Exchange Commission on May 19, 2011.
(11) Incorporated by reference from an exhibit to the registrant’s quarterly report on Form 10-Q for the quarter ended
March 31, 2011 filed with the Securities and Exchange Commission on May 6, 2011.
(12) Incorporated by reference from an exhibit to the registrant’s quarterly report on Form 10-Q for the quarter ended
March 31, 2013 filed with the Securities and Exchange Commission on May 10, 2013.
(13) Incorporated by reference from an exhibit to the registrant’s current report on Form 8-K filed with the Securities and
Exchange Commission on August 5, 2013.
(14) Incorporated by reference from an exhibit to the registrant’s current report on Form 8-K filed with the Securities and
Exchange Commission on September 17, 2013.
(15) Incorporated by reference from an exhibit to the registrant’s current report on Form 8-K filed with the Securities and
Exchange Commission on January 1, 2014.
(16) Incorporated by reference from an exhibit to the registrant’s current report on Form 8-K filed with the Securities and
Exchange Commission on March 20, 2014.
(17) Incorporated by reference from an exhibit to the registrant’s current report on Form 8-K filed with the Securities and
Exchange Commission on March 27, 2014.
(18) Incorporated by reference from an exhibit to the registrant’s current report on Form 8-K filed with the Securities and
Exchange Commission on March 28, 2014.
(19) Incorporated by reference from an exhibit to the registrant’s current report on Form 8-K filed with the Securities and
Exchange Commission on April 1, 2014.
109
(20) Incorporated by reference from an exhibit to the registrant’s current report on Form 8-K filed with the Securities and
Exchange Commission on June 3, 2014.
(21) Incorporated by reference from an exhibit to the registrant’s current report on Form 8-K filed with the Securities and
Exchange Commission on September 18, 2014.
(22) Incorporated by reference from an exhibit to the registrant’s current report on Form 8-K filed with the Securities and
Exchange Commission on October 24, 2014.
110
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SIGNATURES
THE PROVIDENCE SERVICE CORPORATION
By:
/s/ WARREN S. RUSTAND
Warren S. Rustand
Chief Executive Officer
Dated: March 16, 2015
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
/S/ WARREN S. RUSTAND
Warren S. Rustand
Chief Executive Officer and Director
(Principal Executive Officer)
Date
March 16, 2015
/S/ ROBERT E. WILSON
Robert E. Wilson
/S/ CHRISTOPHER SHACKELTON
Christopher Shackelton
(Principal Financial and Accounting Officer)
March 16, 2015
Chairman of the Board
March 16, 2015
/S/ RICHARD A. KERLEY
Richard A. Kerley
/S/ KRISTI L. MEINTS
Kristi L. Meints
Director
Director
March 16, 2015
March 16, 2015
111
Providence Service Corporation
Ratio of Earnings to Fixed Charges
Exhibit 12.1
2010
For the Years
Ended December 31,
2012
(in thousands, except ratios)
2013
2011
Earnings:
Income before income taxes and minority
interest ........................................................ $
Fixed charges ................................................
Earnings ....................................................... $
Fixed charges:
41,292 $
28,197
69,489 $
26,885 $
22,583
49,468 $
16,693 $
21,436
38,129 $
31,215 $
20,869
52,084 $
Interest expense ............................................. $
Interest element of rentals .............................
Fixed charges ................................................ $
16,268 $
11,929
28,197 $
10,206 $
12,377
22,583 $
7,640 $
13,796
21,436 $
7,035 $
13,834
20,869 $
2014
27,777
34,513
62,290
14,847
19,666
34,513
Ratio of earnings to fixed charges ....................
2.46
2.19
1.78
2.50
1.80
EXHIBIT 21.1
Name of Subsidiary
Providence Community Corrections, Inc. (f/k/a Camelot Care
Corporation)
Cypress Management Services, Inc.
Family Preservation Services, Inc.
Family Preservation Services of Florida, Inc.
State/Country
of Incorporation
Delaware
Florida
Virginia
Florida
Family Preservation Services of North Carolina, Inc.
North Carolina
Family Preservation Services of West Virginia, Inc.
West Virginia
Providence of Arizona, Inc.
Providence Service Corporation of Delaware
Providence Service Corporation of Maine
Arizona
Delaware
Maine
Providence Service Corporation of Oklahoma
Oklahoma
Providence Service Corporation of Texas
Rio Grande Management Company, LLC
Texas
Arizona
Family Preservation Services of Washington DC, Inc.
Dist. of Columbia
Dockside Services, Inc.
Indiana
Providence Community Services, Inc. (f/k/a Pottsville
Behavioral Counseling Group, Inc.)
Pennsylvania
Providence Community Services, LLC
College Community Services
Choices Group, Inc.
Providence Management Corporation of Florida
Social Services Providers Captive Insurance Co.
Drawbridges Counseling Services, LLC
Oasis Comprehensive Foster Care, LLC
Delaware
California
Delaware
Florida
Arizona
Kentucky
Kentucky
Children’s Behavioral Health, Inc.
Pennsylvania
Maple Star Nevada
Transitional Family Services, Inc.
AlphaCare Resources, Inc.
Family-Based Strategies, Inc.
Nevada
Georgia
Georgia
Delaware
A to Z In-Home Tutoring, LLC
W. D. Management, LLC
0798576 B.C. LTD
PSC of Canada Exchange Corp.
WCG International Consultants Ltd.
Camelot Care Centers, Inc.
Health Trans, Inc.
LogistiCare Solutions, LLC
Provado Technologies, LLC
Provado Insurance Service, Inc.
Red Top Transportation, Inc.
Nevada
Missouri
Canada
Canada
Canada
Illinois
Delaware
Delaware
Florida
South Carolina
Florida
LogistiCare Solutions Independent Practice Association, LLC
New York
Providence Human Services of Washington, Inc.
Washington
Ride Plus LLC
AmericanWork, Inc.
The ReDCo Group, Inc.
Raystown Developmental Services, Inc.
Providence of Idaho, LLC
Delaware
Delaware
Pennsylvania
Pennsylvania
Delaware
Providence Human Services of Massachusetts LLC
Delaware
Maple Star Oregon
Pinnacle Acquisitions LLC
Providence Human Services LLC
Pinnacle Acquisitions C.V.
Pinnacle UK Bidco Limited
Pinnacle Australia Bidco Pty Ltd
Pinnacle Australia Holdco Pty Ltd
Ingeus Pty Limited
Ingeus Australasia Pty Ltd
Mission Providence Pty Ltd
Ingeus Australia Pty Ltd
Oregon
Delaware
Delaware
Netherlands
United Kingdom
Australia
Australia
Australia
Australia
Australia
Australia
Ingeus Victoria Pty Ltd
Ingeus Europe Limited
Ingeus Investments Limited
Ingeus UK Limited
Ingeus Training Limited
Zodiac Training Limited
Australia
United Kingdom
United Kingdom
United Kingdom
United Kingdom
United Kingdom
The Reducing Reoffending Partnership Limited
United Kingdom
Ingeus SAS (France)
Ingeus GmBH (Germany)
Ingeus AB (Sweden)
Ingeus Co. Ltd. (Korea)
Ingeus Sp z.o.o. (Poland)
Ingeus AG (Switzerland)
Ingeus LLC (Saudi Arabia)
Ingeus S.L. (Spain)
Mission Medical Group of Alabama, L.L.C.
Matrix Medical Network of Arizona, L.L.C.
Matrix Medical Foundation, Inc.
France
Germany
Sweden
Korea
Poland
Switzerland
Saudi Arabia
Spain
Alabama
Arizona
Arizona
Regional Physician Services of California, P.C.
California
Matrix Medical Network of Colorado, L.L.C.
Colorado
Regional Physician Services Connecticut, P.C.
Connecticut
Ascender Software, Inc.
CCHN Holdings, Inc.
CCHN Group Holdings, Inc.
Community Care Health Network, Inc.
MMNRA, LLC
Votiva Health, LLC
Matrix Medical Network of Florida, L.L.C.
Matrix Medical Network of Georgia, L.L.C.
Regional Physician Services of Idaho, P.C.
Delaware
Delaware
Delaware
Delaware
Delaware
Delaware
Florida
Georgia
Idaho
Regional Physician Services of Illinois, P.C.
Matrix Medical Network of Indiana, P.C.
Matrix Medical Network of Kansas, P.A.
Matrix Medical Network of Kentucky, LLC
Mission Medical Group of Louisiana, L.L.C.
Illinois
Indiana
Kansas
Kentucky
Louisiana
Regional Physician Services of Massachusetts, P.C.
Massachusetts
Matrix Medical Network of Michigan, P.C.
Michigan
Regional Physician Services of Minnesota, P.C.
Minnesota
Matrix Medical Network of Missouri, LLC
Missouri
Mission Medical Group, P.A.
Mississippi
Matrix Medical Network of North Carolina, PC
North Carolina
Matrix Medical Network of New Jersey, P. C.
New Jersey
Matrix Medical Network of New Mexico, L.L.C.
New Mexico
Matrix Medical Network of Nevada, L.L.C.
Matrix Medical of New York, PC
Regional Physician Services, P.C.
Regional Physician Services of Ohio, P.C.
Nevada
New York
New York
Ohio
Matrix Medical Network of Oklahoma, L.L.C.
Oklahoma
Matrix Medical Network of Oregon, L.L.C.
Oregon
Regional Physician Services Pennsylvania, P.C.
Pennsylvania
Regional Physician Services Rhode Island, P.C.
Rhode Island
Regional Physician Services South Carolina, P.C.
South Carolina
Matrix Medical Network of Tennessee, P.C.
Tennessee
Regional Physician Services of Texas, P.A.
Matrix Medical Network of Utah, L.L.C.
Texas
Utah
Matrix Medical Network of Virginia, L.L.C.
Virginia
Matrix Medical Network of Washington, L.L.C.
Washington
Matrix Medical Network of Wisconsin, S.C.
Wisconsin
Matrix Medical Network of West Virginia P.C.
West Virginia
Consent of Independent Registered Public Accounting Firm
Exhibit 23.1
The Board of Directors
The Providence Service Corporation:
We consent to the incorporation by reference in the registration statement Nos. 333-166978, 333-151079, 333-112586, 333-
117974, 333-127852, 333-135126, and 133-145843 on Form S-8 and registration statement No. 333-148092 on Form S-3 of
The Providence Service Corporation and subsidiaries (the Company) of our report dated March 16, 2015, with respect to the
consolidated balance sheets of the Company as of December 31, 2014 and 2013, and the related consolidated statements of
income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended
December 31, 2014, and the effectiveness of internal control over financial reporting as of December 31, 2014, which reports
appear in the December 31, 2014 annual report on Form 10-K of the Company.
Our report on the effectiveness of internal control over financial reporting as of December 31, 2014, contains an explanatory
paragraph that states that the aggregate amount of total assets and revenue of Ingeus Limited and subsidiaries of $84.1 million
and $179.3 million, respectively, and of CCHN Group Holdings, Inc. and subsidiaries of $53.2 million and $43.3 million,
respectively, are excluded from management’s assessment of the effectiveness of internal control over financial reporting.
Our audit of internal control over financial reporting also excluded an evaluation of the internal control over financial
reporting of these entities.
Phoenix, Arizona
March 16, 2015
/s/KPMG LLP
Exhibit 31.1
I, Warren S. Rustand, certify that:
CERTIFICATIONS
1. I have reviewed this annual report on Form 10-K of The Providence Service Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Date: March 16, 2015
/s/ Warren S. Rustand
Warren S. Rustand
Chief Executive Officer
(Principal Executive Officer)
Exhibit 31.2
I, Robert E. Wilson, certify that:
CERTIFICATIONS
1. I have reviewed this annual report on Form 10-K of The Providence Service Corporation;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material
fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting
to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report)
that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial
reporting; and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal
control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or
persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role
in the registrant’s internal control over financial reporting.
Date: March 16, 2015
/s/ Robert E. Wilson
Robert E. Wilson
(Principal Financial and Accounting Officer)
THE PROVIDENCE SERVICE CORPORATION
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States
Code), the undersigned officer of The Providence Service Corporation (the “Company”), does hereby certify with respect to
the Annual Report of the Company on Form 10-K for the year ended December 31, 2014 (the “Report”) that, to the best of
such officer’s knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Company.
Date: March 16, 2015
/s/ Warren S. Rustand
Warren S. Rustand
Chief Executive Officer
(Principal Executive Officer)
THE PROVIDENCE SERVICE CORPORATION
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Section 1350 of Chapter 63 of Title 18 of the United States
Code), the undersigned officer of The Providence Service Corporation (the “Company”), does hereby certify with respect to the
Annual Report of the Company on Form 10-K for the year ended December 31, 2014 (the “Report”) that, to the best of such
officer’s knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Date: March 16, 2015
/s/ Robert E. Wilson
Robert E. Wilson
(Principal Financial and Accounting Officer)
COR POR AT E
I N FOR M AT ION
B O A R D O F D I R E C T O R S
E X E C U T I V E O F F I C E R S
Christopher Shackelton 1, 2, 3
Chairman of the Board
Managing Partner
Coliseum Capital Management
Richard A. Kerley 1, 2, 3
Retired Chief Financial Officer
Peter Piper, Inc.
Kristi L. Meints 1, 2, 3
Retired Chief Financial Officer
Chicago Systems Group
Warren S. Rustand
Chief Executive Officer
Providence Service Corporation
1 Nominating and Corporate Governance Committee
2 Audit Committee
3 Compensation Committee
C O M PA N Y H E A D Q U A R T E R S
Providence Service Corporation
64 East Broadway Boulevard
Tucson, AZ 85701
Phone: 520-747-6600/800-747-6950
Fax: 520-747-6605
Web: www.provcorp.com
Warren S. Rustand
Chief Executive Officer
James M. Lindstrom
Executive Vice President,
Chief Financial Officer
Walter Cooper
Chief Executive Officer,
Matrix Medical Network
Michael C. Fidgeon
Chief Executive Officer,
Providence Human Services
Michael-Bryant Hicks
Senior Vice President, General Counsel,
Corporate Secretary, and Chief Compliance
Officer
Jeff Perry
Chief Information Officer
Justina Sanchez-Uzzell
Senior Vice President, Chief People Officer
Jack Sawyer
Chief Executive Officer,
Ingeus UK Limited
Herman M. Schwarz
Chief Executive Officer,
LogistiCare
I N V E S T O R R E L AT I O N S
The investing public, securities analysts and
stockholders seeking information about
the Company should visit the Investor
Information section of our corporate web-
site at www.provcorp.com, or contact
Investor Relations at either the Company’s
corporate headquarters or via e-mail at
irinfo@provcorp.com.
C O M M O N S T O C K
The Company’s Common Stock is traded on
The NASDAQ Stock Market LLC’s Global
Select Market under the symbol “PRSC.”
I N D E P E N D E N T R E G I S T E R E D
P U B L I C A C C O U N T I N G F I R M
KPMG LLP
L E G A L C O U N S E L
Paul Hastings LLP
75 East 55th Street
New York, NY 10022
T R A N S F E R A G E N T
Computershare Investor Services, LLC
P.O. Box 43078
Providence, RI 02940-3078
Phone: 781-575-3120/800-962-4284
S A F E H A R B O R
This annual report contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. Words such as “believe,”
“demonstrate,” “expect,” “estimate,” “forecast,” “anticipate,” “should” and “likely” and similar expressions identify forward-looking statements. In addition,
statements that are not historical should also be considered forward-looking statements. Readers are cautioned not to place undue reliance on those forward-
looking statements, which speak only as of the date the statement was made. Such forward-looking statements are based on current expectations that involve a
number of known and unknown risks, uncertainties and other factors which may cause actual events to be materially different from those expressed or implied
by such forward-looking statements. These factors include, but are not limited to, the global credit crisis, capital market conditions, the implementation of
the healthcare reform law, state budget changes and legislation and other risks detailed in Providence’s filings with the Securities and Exchange Commission,
including this Annual Report on Form 10-K for the fiscal year ended December 31, 2014. Providence is under no obligation to (and expressly disclaims any
such obligation to) update any of the information in this document if any forward-looking statement later turns out to be inaccurate whether as a result of new
information, future events or otherwise.
Annual Report Design by Curran & Connors, Inc. / www.curran-connors.com