10-K 1 prsc20151231_10k.htm FORM 10-K prsc20151231_10k.htm

 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, 2015

 

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

86-0845127

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

   

44 East Broadway Blvd. Suite 350,

Tucson, Arizona

85701

(Address of principal

executive offices)

(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

 

Name of each exchange on which registered

Common Stock, $0.001 par value per share

 

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

 

 
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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

  

 

Accelerated filer

 

 

 

Non-accelerated filer

  

 (Do not check if a smaller reporting company)

 

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, 2015) was $607.3 million.

 

As of March 8, 2016, there were outstanding 14,866,327 shares (excluding treasury shares of 2,332,679) of the registrant’s Common Stock, $.001 par value per share, which is the only outstanding capital stock of the registrant.

 

 


DOCUMENTS INCORPORATED BY REFERENCE

 

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 2016 stockholder meeting; provided that if such proxy statement is not filed on or before April 30, 2016, such information will be included in an amendment to this Report on Form 10-K filed on or before such date.

 


 

 
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TABLE OF CONTENTS

 

 

 

Page No.

PART I

 
     

Item 1.

Business

4

     

Item 1A.

Risk Factors

15

     

Item 1B.

Unresolved Staff Comments

29

     

Item 2.

Properties

29

     

Item 3.

Legal Proceedings

29

     

Item 4.

Mine Safety Disclosures

30

   

PART II

 
     

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

31

     

Item 6.

Selected Financial Data

33

     

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

36

     

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

61

     

Item 8.

Financial Statements and Supplementary Data

62

     

Item 9.

Changes in and Disagreements With Accountants on Accounting and Financial Disclosure

117

     

Item 9A.

Controls and Procedures

117

     

Item 9B.

Other Information

118

   

PART III

 
     

Item 10.

Directors, Executive Officers and Corporate Governance

119

     

Item 11.

Executive Compensation

119

     

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

119

     

Item 13.

Certain Relationships and Related Transactions, and Director Independence

119

     

Item 14.

Principal Accounting Fees and Services

119

   

PART IV

 
     

Item 15.

Exhibits, Financial Statement Schedules

119

   

SIGNATURES

127

   

EXHIBIT INDEX

 

 

 
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PART I 

 

Item 1.

Business.

 

Background 

 

 

The Providence Service Corporation (the “Company” or “Providence”), a Delaware corporation formed in 1996, is a holding company, whose subsidiaries provide critical healthcare and workforce development services. The Company operates within two key industry sectors-US healthcare and global workforce development-through its three operating segments: Non-Emergency Transportation Services (“NET Services”), Workforce Development Services (“WD Services”) and Health Assessment Services (“HA Services”). NET Services coordinates non-emergency transportation for individuals whose limited mobility and/or financial resources would otherwise hinder them from accessing necessary healthcare and social services. WD Services primarily provides employability and offender rehabilitation services to eligible participants of government sponsored programs. HA Services, provides care optimization and delivery solutions, including comprehensive health assessments (“CHAs”) for health plans as well as in-home care management offerings.

 

Ingeus Proprietary Limited and its wholly and partly-owned subsidiaries and associates (collectively, “Ingeus”) was acquired on May 30, 2014, and is included in WD Services. CCHN Group Holdings, Inc. and its wholly-owned subsidiaries and affiliates operating under the tradename Matrix (“Matrix”) was acquired on October 23, 2014, and is included in HA Services. On November 1, 2015, we completed the sale of the Human Services segment, which is accounted for as a discontinued operation.

 

As of December 31, 2015, we operated in 44 states and the District of Columbia in the United States (“US”), and in 11 countries outside of the US.

 

Holding Company Strategy

 

Our holding company strategy is designed to increase shareholder value through positive returns on invested capital and free cash flow generation, which in turn is predicated upon the continued development and efficient delivery of critical and high quality services. Our current service offerings are based upon a common purpose of delivering exceptional value in the healthcare and workforce development service industries, primarily in a community or home setting.

 

In order to meet our goal of increasing shareholder value, we have established certain priorities at both the holding company and segment leadership levels. The priorities of our leadership at the holding company level include: 1) pursuing the highest standards of governance, values and compliance, 2) ensuring operating excellence by attracting, developing, and retaining empowered and accountable segment level leadership with deep industry experience, and 3) allocating capital opportunistically in markets that may be inefficient or where we have an ability to invest at a discount to intrinsic value, particularly where our experience, analysis, and long-term perspective can provide an advantage over competitors. As demonstrated in 2015 with the divestiture of our Human Services segment, we also may dispose of current or future investments based on a variety of factors, including availability of alternative opportunities to deploy capital or otherwise maximize shareholder value as well as other strategic considerations.

 

Within our current segments, we seek to leverage our market reputation, customer relationships, and core competencies to capture growth opportunities within our current markets and service lines. We also intend to utilize these assets to expand organically and through acquisitions into adjacent markets and complementary service lines. Our core competencies include developing and managing large provider networks, tailoring healthcare and workforce development service offerings to the unique needs of diverse communities and populations, and designing service delivery models to achieve superior outcomes in low cost settings. We also continuously strive to capture service delivery efficiencies while also improving the quality of our offerings.

 

 
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Holding Company Competition 

 

In identifying, evaluating and selecting strategic opportunities, we may encounter intense competition from other entities having similar business objectives, such as strategic investors, private equity groups and special purpose acquisition corporations. Many of these entities are well established and have extensive experience identifying and effecting transactions directly or through affiliates. These competitors may possess greater human and other resources than us, and our financial resources may be relatively limited in comparison. Any of these factors may place us at a competitive disadvantage in contrast to our competitors.

 

Holding Company Employees

 

In the execution of our holding company strategy, our 30 person holding company staff utilizes their investment experience in both public and private markets, previous operational leadership in a variety of industries, as well as other typical public holding company capabilities, including competencies in the areas of accounting, tax, human resource, information technology and legal. Our colleagues may also supplement our segment leadership teams in the areas of strategic development, operational and financial improvement, and cross segment sales or operational synergies on a selective basis. During 2016, we intend to relocate our executive offices to700 Canal St., Stamford, CT, 06901.

 

Financial information about our segments

 

The Company operates in three segments, NET Services, WD Services and HA Services. Financial information about segments and geographic areas, including revenues, operating income (loss), and long-lived assets of each segment and geographic information is included in Note 23, Segments, 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 operations.

 

Effective November 1, 2015, we sold our Human Services segment. The operating results of the Human Services segment have been reclassified into discontinued operations in the consolidated financial statements in all periods presented.

 

Our Operating Segments

 

NET Services

 

Services offered.  NET Services provides non-emergency transportation solutions to clients in 39 states and the District of Columbia. As of December 31, 2015, approximately 24.8 million individuals were eligible to receive our transportation services. For 2015, 2014 and 2013, NET Services accounted for 63.9%, 77.8% and 96.4%, respectively, of our consolidated revenue.

 

NET Services contracts with state and regional Medicaid programs, local government agencies, hospital systems, and managed care organizations (“MCOs” and collectively “NET payers”) for the coordination of their members’ (“NET end-users”) non-emergency transportation needs. NET end-users are typically Medicaid or Medicare eligible members, whose limited mobility and/or financial resources would otherwise hinder their ability to access necessary healthcare and social services. We believe our transportation services not only improve the quality of life and health of the populations we serve, but also keep individuals in their homes and out of more expensive institutional care settings.

 

To fulfill the transportation needs of NET end-users, we have established a contracted network of approximately 5,000 independent transportation providers, including operators of wheelchair equipped vehicles, multi-passenger vans, taxis, and ambulances. To ensure the safety, quality, and compliance of our network, each of our transportation providers undergoes an in-depth credentialing process, including: (i) criminal background checks, driving record checks, and drug testing of drivers; (ii) driver training on first aid, patient sensitivity, and cultural diversity; (iii) inspections of vehicles and communication systems; and (iv) demonstration of adequate insurance coverage. We receive transportation requests directly from NET end-users or their representatives, such as social workers, through our call/support centers and utilize a proprietary technology platform to coordinate trips in an efficient and user friendly manner. A significant percentage of our transports are standing orders, mostly for patients who require frequent, recurring services such as dialysis treatment, mental health services, physical therapy, or adult day care services. Non-standing orders include more ad hoc needs for transportation including doctor visits, dental appointments, and hospital discharges.

 

 
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Revenue and payers. We contract primarily with state and local government entities and MCOs. Contracts with state Medicaid agencies represent the largest source of our revenue. State payer contracts are typically for three to five years with renewal options. NET Services derived approximately 15.0%, 17.0% and 15.3% of revenue from a single state payer for the years ended December 31, 2015, 2014 and 2013, respectively. The next four largest NET payers in the aggregate comprised approximately 24.2%, 26.2% and 28.4% of NET Services’ revenue for the years ended December 31, 2015, 2014 and 2013, respectively.

 

Approximately 83.6% of NET Services’ revenue in 2015 was generated under capitated contracts where we assume the responsibility of meeting the covered healthcare related transportation requirements of a specific population. Capitated contracts are generally structured with fixed per member, per month payment rates based upon the defined scope of work, actual historical transportation data for the defined population and geographical region to be served, future assumptions on key costs which includes the purchase price of various levels of transport as well as the program population’s future behavior and the necessity of the program. Historically, under a majority of the contracts, we received payment at the outset of the contract month. However, recently certain states have introduced reconciliation contracts, whereby payment is received after the contract month, based upon a reconciliation of the member count. Approximately 14.0% of NET Services’ revenue in 2015 was derived from fee for service and flat fee contracts, under which fees are generated based upon billing rates for specific services or defined membership populations.

 

Seasonality. The quarterly operating income and cash flows of NET Services normally fluctuate as a result of seasonal variations in the business, principally due to lower NET end-user demand during the holiday and winter seasons. While revenue is generally fixed, primarily as a result of the capitated nature of the majority of our contracts, service expense varies based on NET end-user utilization of our services. Thus, we experience quarterly fluctuations in operating income as a result of this seasonal demand.

 

Competition. We compete with a variety of organizations that provide similar healthcare and social services related transportation, such as American Medical Response, Inc., Medical Transportation Management Inc., and SoutheasTrans, Inc. as well as local and regional providers. Most local competitors seek to win contracts for specific counties or small geographic territories whereas we and other larger competitors seek to win contracts for an entire state or large regional area. Historically, we have been successful in competitively bidding for state-wide or other large Medicaid population programs. 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 provider in many instances.

 

Business development.  In states where we have regional contracts, we generally seek to expand our services to additional regions in these states and in contiguous states, in order to improve operating efficiencies and opportunities for our existing operational network. We make decisions about which RFPs to consider centrally, selectively targeting contracts based on our profitability goals and service capabilities.

   

HA Services

  

Services offered.  HA Services provides care optimization and delivery solutions, which primarily includes comprehensive health assessments (“CHAs”), but also includes in-home and community-based care management offerings. HA Services utilizes a national network of approximately 800 nurse practitioners (“NPs”), located across 35 states, to provide its services primarily to members of Medicare Advantage (“MA”) health plans. For 2015 and 2014, HA Services accounted for 12.8% and 3.8%, respectively, of our consolidated revenue. The increase in revenue is due to the acquisition of Matrix in October 2014.

 

HA Services primarily generates revenue from CHAs, which capture a health plan members’ health, social, environment and medication risks. Our services typically commence with a member analysis that utilizes client data, such as medical claims data, to maximize our ability to improve client and member outcomes as a result of the assessment process.

 

 
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Through our contact centers, which include almost 165 colleagues, we pursue additional data collection and schedule assessments. Our NPs then spend up to 60 minutes in the member’s home conducting a comprehensive CHA, which is comprised of a number of distinct components. In addition to checking vital signs and performing a physical examination, our 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, our NPs are also trained to record all diagnoses of medical conditions.

 

The data collected during the CHA is captured electronically on a portable tablet. The CHA process is specifically designed to engage and coordinate with the member’s full care network in order to facilitate follow-up care and treatment. Following each CHA, educational and clinical information is shared with the member, the member’s primary healthcare provider and health plan to identify and close gaps in care. The CHA captures accurate and detailed health diagnoses, which also assists our health plan customers in determining the appropriate reimbursement levels for their member base. In addition to identifying opportunities to improve and optimize care, our service offering can deliver immediate impact on care outcomes.

 

In addition to our primary CHA services, we launched a chronic care management offering in 2015. With data provided by our health plan clients, we utilize analytics to determine which members we can most effectively lower costs and improve outcomes through face-to-face engagements with clinicians. Each program is customized and is served by a comprehensive team of case managers, nurse practitioners, registered nurses, and trained call center colleagues. We anticipate our chronic care management offering will become an increasing proportion of HA Services’ revenue over the next two to three years.

 

Revenue, payers and clients. As of December 31, 2015, HA Services’ customers included approximately 40 health plans, including for profit multi-state health plans and non-profit health plans that operate in only one state or several counties within one state. HA Services serves many of the largest and most prestigious health plans and health systems in the US. For the year ended December 31, 2015, HA Services’ top five customers accounted for approximately 73.6% of its revenue, and its largest customer accounted for approximately 31.1% of its revenue. HA Services enters into annual or multi-annual contracts with its customers under which it is paid on a per assessment basis.

 

Seasonality. Historically, we have experienced higher CHA volume in the second half of the calendar year as a result of an accelerating demand towards calendar year-end. However, in 2015, CHAs were performed more evenly throughout the year as we worked to balance our volume to more efficiently utilize our NPs.

 

Competition. We believe that Matrix and CenseoHealth are the largest independent providers of CHAs to the health plan market. There are many smaller volume competitors, including Advance Health, EMSI Healthcare Services, MedXM, and Inovalon, Inc. Some plans in-source CHA services for their members through their own network of NPs, including some plans which also utilize our services Our services are often priced at a premium relative to our competitors, and we believe we will continue to maintain a pricing differential as a result of: (i) our national footprint across 35 states, (ii) sophisticated stratification techniques to identify gaps in data and care, (iii) multi-channel member engagement capabilities, (iv) the benefits of HA Services’ community-based NPs, (v) greater control, uniformity and consistency in delivering high quality services for beneficiaries, and (vi) our ability to execute and deliver the assessment goals of our customers. Our chronic care management competitors include Landmark Healthcare, PopHealthcare and Optum.

 

Business development. Our business development capabilities are key to capitalizing on our significant market and growth opportunities. While we have historically been led by a small team of account managers and sales personnel, we believe that additional strategic investments in sales and marketing will enable us to increasingly seize on the healthcare industry’s need for expanded assessment offerings and chronic care management solutions. To that end, we are expanding our dedicated sales personnel, which includes focused sales professionals who have expertise in certain fields, including chronic care management. Marketing strategies include sponsorship and partnership of key industry conferences, client-focused events and programs, and face-to-face marketing.

 

 
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WD Services

 

Services offered.  WD Services provides workforce development and offender rehabilitation services, both of which include employment preparation and placement, apprenticeship and training, and certain health related services, such as employee assistance programs. For 2015, 2014 and 2013, WD Services accounted for 23.3%, 18.4% and 3.6%, respectively, of our consolidated revenue. The growth in revenue is principally due to the acquisition of Ingeus in May 2014.

 

WD Services’ end user client base (“WD end-users”) is broad, and includes both the recently and long-term unemployed, disabled, and unskilled individuals, as well as individuals that are coping with medical illnesses, are newly graduated from educational institutions, or have been released from incarceration.

 

As of December 31, 2015, WD Services operated across 12 countries, including the United Kingdom (“UK”), Australia, France, Saudi Arabia, South Korea, Canada, the US, Germany, Poland, Spain, Sweden, and Switzerland. However, the operations in Sweden will cease during 2016.

 

Revenue, payers and clients. The majority of our revenues are generated by providing employability and training programs with national government entities seeking to reduce unemployment or recidivism rates. For the years ended December 31, 2015 and 2014, approximately 75.5% and 66.6%, respectively, of WD Services’ revenue was derived from operations in the UK. Additionally, approximately 40.0% and 57.2% of our WD Services’ revenue was derived from a single government customer during the years ended December 31, 2015 and 2014, respectively. During the year ended December 31, 2015, approximately 28.2% of WD Services’ revenue was derived from the second largest WD Services customer.

 

The nature of services offered by WD Services often relies on our ability to improve a certain set of outcomes at a reduced cost versus previously utilized in-sourced delivery models. As a result, as we commence new contracts with new transformational delivery models, we are required to invest significant upfront capital for information technology, facilities and transformational costs, such as consultants and redundancy payments. The level of upfront funding required is dependent upon the size and nature of the contract. Although significant upfront funding may be required, revenues are often payable only as services are delivered and in some cases only after incentive measures have been achieved. As a result of these two factors, there can be significant variability in our earnings from quarter to quarter, and from year to year. Thus, we measure our contracts success over the term of the contract and believe the financial results of WD Services are best viewed over a multi-year perspective.

 

Seasonality. While there has been period-to-period variability in WD Services’ earnings due to the factors discussed above and also 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 the WD Services’ results of operations.

 

Competition. In the UK, Australia and Saudi Arabia, the workforce development and offender rehabilitation market is served primarily by large multi-national corporations that provide a wider range of outsourced services than we offer. In Canada, France, Germany, South Korea, Spain, Sweden, Switzerland, and the US, our competition primarily consists of small, privately owned companies. Our larger competitors include Maximus, Capita, G4S, Sodexo, Interserve and Serco.

 

The market for services to governments is competitive and subject to change and pricing pressure, particularly during the bidding for contract renewals. However, due to the critical nature of our offerings and the end-users we serve, market entry can be difficult for new entrants or those without previous examples of service excellence. In addition, due to the complexity, significant upfront investment, and long-term nature of the contracts, barriers to entry exist for those potential new competitors without prior, relevant experience.

 

Business development. Our business development activities are performed at both the local level as well as centrally in WD Services’ London headquarters. Through local and global networks and relationships, we become aware of new opportunities for which we develop bids through competitive processes. The nature of the competitive processes varies from highly competitive to being one of a few, or the sole, service providers to bid on a contract.

 

 
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Our primary focus is on expanding our portfolio of national contracts within our areas of expertise. However, other key elements of our long-term strategy include leveraging our expertise in certain adjacent niche or inefficient markets, expanding our services to private corporations, and increasing the provision of skills and training services as well as health-related services. In addition, in late 2015, our bidding process was reviewed and transformed with an improved focus on pursuing only those contracts where we can estimate financial outcomes within our investment and risk criteria and where we can demonstrate differentiated and improved outcomes for our clients.

 

Employees

 

As of December 31, 2015, we employed approximately 9,072 clinical, client service and administrative personnel. Of these employees, 3,668 work in our NET Services segment, 4,325 work in our WD Services segment and 1,049 work in our HA Services segment.

 

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.

 

None of our US employees are members of a union. We have nearly 3,000 and 370 full-time employees in the UK and France, respectively. Certain of our UK employees are members of the NAPO and Unison unions and certain of our employees in France are members of the Confederation Generale du Travail. Unionized employees in both countries have collective bargaining rights. Participation in unions is confidential under European employment laws. We believe we have good relationships with our employees, both unionized and non-unionized, in the US and internationally.

 

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, requirements for contracting with MA plans, and contractual requirements imposed upon us by the state and local agencies with which we contract for such healthcare and human services. 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.

 

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;

 

the Health Insurance Portability and Accountability Act of 1996 (“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.

 

 
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A violation of any law 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. The False Claims Act defines a claim as a demand for money or property made directly to the government or to a contractor, grantee, or other recipient if the money is to be spent on the government’s behalf or if the government will reimburse the contractor or grantee. Liability can be incurred for submitting (or causing another to submit) false claims with actual knowledge or for submitting false claims with reckless disregard or deliberate ignorance. Liability can also be incurred for knowingly making or using a false record or statement to receive payment from the federal government or 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.

 

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 claims for healthcare services that may have been improperly submitted.

 

 
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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 (“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.

 

The Final Rule on Enforcement of the HIPAA Administrative Simplification provisions, including the transaction standards, the security standards and the privacy rule, published by DHHS 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 healthcare privacy regulations to other HIPAA standards, including security, transactions and the appropriate use of service code sets.

 

The Health Information Technology for Economic and Clinical Health Act, (“HITECH”), enacted as part of the American Recovery and Reinvestment Act of 2009, extends certain of HIPAA’s obligations to parties providing services to healthcare entities covered by HIPAA known as “business associates,” imposes new notice of privacy breach reporting obligations, extends enforcement powers to state attorney generals and amends the HIPAA privacy and security laws to strengthen the civil and criminal enforcement of HIPAA. HITECH establishes 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.

 

Additionally, the HITECH Final Rule imposes various requirements on covered entities and business associates, and expands the definition of “business associates” to cover contractors of business associates. We are continuing to assess our compliance obligations under HIPAA as modified by HITECH, and are implementing operational and systems changes, associate education and resources. There is no guarantee that we will be able to implement them adequately given HIPAA’s complexity and the recently finalized HIPAA and HITECH 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, 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 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 healthcare 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, Medicare or other programs;

 

 

 

revocation of our license; or

 

 

 

contract termination.

 

While we believe that our programs are in compliance with Medicare, 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. Any determination that we have not complied with applicable rules and regulations could result in adjustment of payments or the incurrence of fines and penalties, or in situations of significant compliance failures review or non-renewal of related contracts.

 

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, as well as engaging in fee-splitting arrangements with these healthcare providers. Among other things, we currently contract with and employ 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. For example, our mid-level practitioners, e.g., NPs, are subject to state laws requiring physician supervision and state laws governing mid-level scope of practice. As the use of mid-levels by physicians increases, state governing boards are implementing more robust regulations governing mid-levels and their scope of practice under physician supervision. Our ability to provide mid-level practitioner services may be restricted by the enactment of new state laws governing mid-level scope of practice and by state agency interpretations and enforcement of such existing laws. 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, and the recidivism rate. 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.

 

Our WD Services segment is also subject to the European Union’s and other countries’ data security and protection laws and regulations. These laws and regulations may restrict the flow of information, including information about employees or service users, from this segment to the Company in the United States. In certain instances, informed consent to the data transfer must be given by the affected employee or service user. Compliance with such laws and regulations may make it more difficult for the Company to gather data necessary to ensure the appropriate operation of its internal controls or to detect corruption resulting in the need for additional controls or increasing the Company’s costs to maintain appropriate controls. Failure to comply with such laws and regulations could result in fines or penalties against the Company.

 

Further, our international operations are subject to various US and foreign statutes that prevent bribery and corruption, including the US Foreign Corrupt Practices Act and the UK’s Bribery Act. These statutes generally prevent the provision of anything of value to government officials for the purposes of influencing official decisions or obtaining or retaining business or otherwise obtaining favorable treatment and require the maintenance of adequate record-keeping and internal accounting practices to accurately reflect transactions. In addition, many countries in which we operate have antitrust or competition regulations which prohibit collusive tendering or bid-rigging behavior. Failure to comply with any of these statutes and regulations could result in fines or penalties and could have a negative impact on our future operations.

 

 

Additional Information

 

Our website is www.prscholdings.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 David Shackelton, Chief Financial Officer, telephone number: (520) 747-6600.

 

 
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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 or coverage for services by payers;

 

changes in Medicare, Medicaid or other federal or state rules, regulations, policies 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;

 

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 become 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 national, state, and 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 healthcare and workforce development services and we believe they 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.

 

 
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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 three 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 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 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.

 

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.

 

 
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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 not-for-profit organizations and community based organizations, larger companies, 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, 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. Similar regimes exist in other WD Service jurisdictions such as Australia, Canada and South Korea. 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, enforcement orders 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.

 

 
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We depend on our key personnel.

 

Our future success will depend upon our continued ability to identify, hire, develop, motivate and retain highly skilled individuals, with the continued contributions of our senior management being especially critical to our success. Competition for well-qualified employees across Providence and its various businesses is intense and our continued ability to compete effectively depends, in part, upon our ability to attract new employees. While we have established programs to attract new employees and provide incentives to retain existing employees, particularly our senior management, we cannot assure you that we will be able to attract new employees or retain the services of our senior management or any other key employees in the future. Effective succession planning is also important to our future success. If we fail to ensure the effective transfer of senior management knowledge and smooth transitions involving senior management across our various businesses, our ability to execute short and long term strategic, financial and operating goals, as well as our business, financial condition and results of operations generally, could be adversely affected.

 

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 regulations relating to, among other things:

 

 

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 and settings available to administer CHAs. Further, changes in or adoption of new state laws governing the scope of practice of mid-level practitioners, or more restrictive interpretations of such laws, may restrict our ability to provide services using nurse practitioners. Any such implementation of additional regulations on the CHA industry by CMS or other regulatory bodies or further regulation of mid-level practitioners 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 2015, our WD Services segment operated in 11 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 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 ban from participating in public procurement tenders for up to five years, or until the organization in question has put in place “self clean” measures to the satisfaction of the procuring authority. 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 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.

 

 
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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 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. Further, our WD Services segment is subject to the European Union’s and other countries’ data security and protection laws and regulations. These laws and regulations may restrict the flow of information, including information about employees or service users, from this segment to the Company in the US. In certain instances, informed consent to the data transfer must be given by the affected employee or service user. Compliance with such laws and regulations may make it more difficult for the Company to maintain the records and internal accounting practices necessary to ensure the appropriate operation of our internal controls or to detect corruption. Any breach of bribery, corruption and collusive tendering laws could also expose our operations in Europe to a ban from participating in public procurement tenders for up to 5 years, or until the organization in question has put in place “self clean” measures to the satisfaction of the procuring authority.

 

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 (“HIPAA”) contain provisions that:

 

 

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 internationally, 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.

 

 
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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 public procurement authorities to impose a ban from participating in public procurement tenders for up to five years, or until the organization in question has put in place “self clean” measures to the satisfaction of the procuring authority where companies are found guilty of fraud or certain other criminal offenses. Authorities can also exercise their discretion to blacklist companies for up to two years where they believe they have been involved in acts of gross misconduct or until the organization in question has put in place “self clean” measures to the satisfaction of the procuring authority. 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.

 

Our business could be adversely affected by future legislative changes that hinder or reverse the privatization of 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 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.

 

 
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However, the Deficit Reduction Act of 2005 (“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.

 

Currently, many of the US states and overseas countries in which we operate are facing budgetary shortfalls or changes in budgetary priorities. 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 the revenues in our segments from a few payers under a small number of contracts. For example, for the years ended December 31, 2015, 2014 and 2013, we generated approximately 52.8%, 56.2% and 61.8%, respectively, of our revenue from our top ten payers. Additionally, our top five payers related to our NET Services operating segment represent, in the aggregate, approximately 39.2%, 43.2% and 43.6%, respectively, of our NET Services operating segment revenue for the years ended December 31, 2015, 2014 and 2013. The top payer related to our WD Services operating segment represented 40.0% and 57.2% of our WD Services operating segment revenue for the years ended December 31, 2015 and the period from May 31, 2014 to December 31, 2014, respectively. Additionally, the top payer related to our HA Services operating segment represented 31.1% and 43.2% of our HA Services operating segment revenue for the year ended December 31, 2015 and the period from October 24, 2014 to December 31, 2014, respectively. 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.

 

 
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Changes to the fee structure in our workforce development contracts with the UK Department of Work & Pension could have a material adverse effect on our operating results.

 

Approximately 40.0% and 57.2% of WD Services’ revenues for the year ended December 31, 2015 and the period from May 31, 2014 to December 31, 2014, respectively, 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 the DWP, effective July 1, 2014, the fee structure has changed, eliminating certain upfront payments and discounting certain other fees. As a result, going forward, WD Services 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 the 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 can be terminated prior to expiration, without cause and without penalty to the payers. There can be no assurance that out contracts 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.

 

With respect to many of our contracts, the payer may terminate the contract without cause, at will and without penalty to the payer, either immediately or upon the expiration of a short notice period in the event that, among other reasons, 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.

 

If we fail to satisfy our contractual obligations, we could be liable for damages and financial penalties, which may place existing pledged performance and payment bonds at risk as well as harm our ability to keep our existing contracts or obtain new contracts and future bonds.

 

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.

 

 
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If we fail to estimate accurately the cost of performing certain contracts, we may experience reduced or negative margins.

 

Approximately 83.6%, 84.1% and 83.4% of our NET services revenue during 2015, 2014 and 2013, respectively, was generated under capitated contracts with the remainder generated through fee for service (“FFS”) and flat fee contracts. Our WD Services segment also provides services under 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, medical covered programs outlined, identified populations to be serviced, 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 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. 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.

 

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. 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. Our HA and WD Services operating segments typically do not experience seasonal fluctuations in operating results, however, quarterly volatility in revenue and earnings is common due to uneven customer demand in our HA Services segment and the timing of commencement and expiration of certain major contracts in our WD Services segment.

 

 

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, government regulations, 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, instituting information technology systems, 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 any related contract payments or sufficient payments needed to cover start-up costs. 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, 2015, we had approximately $305.0 million of total indebtedness and approximately $212.1 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 principal 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, 2015, we had $305.0 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, 2015. An increase of 1% in the LIBOR rate would cause an increase in interest expense of approximately $6.8 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 reinsure a substantial portion of our automobile, general liability, professional liability and workers’ compensation insurance. We also reinsured 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. However, effective February 15, 2011, we did not renew our reinsurance agreement and do 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 and substantially 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 reinsurance and self-insurance programs. Any increase to these programs 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.

 

 
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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 to make, 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 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;

   

costs associated with litigation or other claims arising in connection with the acquired company;

   

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. Moreover, we rely heavily on the representations and warranties and related indemnities provided to us by the sellers of acquired companies, including as they relate to creation, ownership and rights in intellectual property and compliance with laws and contractual requirements. Our failure to address these risks or other problems encountered in connection with past or future acquisitions and investments could cause us to fail to realize the anticipated benefits of such acquisitions or investments, incur unanticipated liabilities and harm our business generally.

 

Contract profitability may decline due to actions by governmental agencies.

 

In our WD Services segment, our operating costs and profitability may be significantly impacted by actions required by a government agency, such as the availability of information systems maintained by the government to streamline enrollment into our service programs. In addition, certain contracts may require that we hire former government employees, in relation to offering our service programs. Lastly, revenue under certain contracts may be adjusted prospectively if client volumes are below expectations. If the Company is unable to adjust its costs accordingly, profitability is negatively impacted.

 

Our estimated income taxes could be materially different from income taxes that we ultimately pay.

 

We are subject to income taxes in both the US and numerous jurisdictions abroad. Significant judgment and estimation is required in determining our provision for income taxes and related matters. In the ordinary course of our business, there are many transactions and calculations where the ultimate tax determinations are uncertain or otherwise subject to interpretation. Our determination of our income tax liability is always subject to review by applicable tax authorities and we are currently subject to audits in a number of jurisdictions. Although we believe our income tax estimates and related determinations are reasonable and appropriate, relevant taxing authorities may disagree. The ultimate outcome of any such audits and reviews could be materially different from estimates and determinations reflected in our historical income tax provisions and accruals. Any adverse outcome of any such audit or review could have an adverse effect on our financial condition and results of operations.

 

 
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Significant commercial arrangements could result in operating and financial difficulties.

 

In 2014 we entered into a joint venture in order to bid on a new contract. Our future growth may depend, in part, on future similar arrangements, any of which could be material to our financial condition and results of operations. The success of these arrangements will depend in part on the satisfactory performance of contractual obligations by our partners, over which we will not have control. Further, challenges may arise relating to such arrangements, such as governance, accountability and decision-making conflicts, which may be costly to resolve or may make the arrangement less successful.

 

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 our 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 11 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.

 

Our revenues and expenses are subject to foreign economic and currency risks due to our operations outside of the US.

 

We have operations in 11 countries outside the US. The value of the US dollar against other foreign currencies has seen significant volatility recently. Our reported financial condition and results of operations are reported in multiple currencies, and are then translated into US dollars at the applicable exchange rate for inclusion in our consolidated financial statements. Appreciation of the US dollar against these other currencies will have a negative impact on our reported net revenue and operating income while depreciation of the US dollar against such currencies will have a positive effect on reported net revenue and operating income.

 

 
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Item 1B.

Unresolved Staff Comments. 

 

None.

 

Item 2.

Properties. 

 

As of March 2016, our holding company headquarters was located in an owned building in Tucson, Arizona. In December 2015 we signed a lease for additional holding company office space in Stamford, Connecticut. In 2016, we intend to relocate principal executive offices into this new office space located at 700 Canal St., Stamford, CT, 06901. We intend to also maintain our holding company office space in Tucson, Arizona. NET Services leases space in approximately 38 locations, WD Services leases space in approximately 299 locations, and HA Services leases space in approximately three locations. The lease terms vary and we believe are generally at market rates. 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. 

 

On June 15, 2015, a putative stockholder class action derivative complaint was filed in the Court of Chancery of the State of Delaware, (the “Court”), captioned Haverhill Retirement System v. Kerley et al., C.A. No. 11149-VCL.  The complaint names Richard A. Kerley, Kristi L. Meints, Warren S. Rustand, Christopher Shackelton (the “Individual Defendants”) and Coliseum Capital Management, LLC (“Coliseum”) as defendants, and the Company as a nominal defendant.  The complaint purported to allege that the dividend rate increase term originally in the Company’s outstanding convertible preferred stock was an impermissibly coercive measure that impaired the voting rights of the Company’s stockholders in connection with the vote on the removal of certain voting and conversion caps previously applicable to the preferred stock (the “Caps”), and that the Individual Defendants breached their fiduciary duties by approving the dividend rate increase term and attempting to coerce the stockholder vote relating to the Company’s preferred stock, and by failing to disclose all material information necessary to allow the Company’s stockholders to cast an informed vote on the Caps. The complaint also purports to allege derivative claims alleging that the Individual Defendants breached their fiduciary duties to the Company by entering into the subordinated note and standby agreement with Coliseum, and granting Coliseum certain stock options.  The complaint further alleges that Coliseum has aided and abetted the Individual Defendants in breaching their fiduciary duties and that demand on the Board is excused as futile.  The complaint sought, among other things, an injunction prohibiting the stockholder vote relating to the dividend rate increase, a finding that the Individual Defendants are liable for breaching their fiduciary duties to the Company and the Company’s stockholders, a finding that Coliseum is liable for aiding and abetting the Individual Defendant’s breaches of their fiduciary duties, a finding that Coliseum is liable for unjust enrichment, a finding that demand on the Board is excused as futile, a revision or rescission of the terms of the subordinated note and preferred stock as necessary and/or appropriate, a requirement for the Company to reform its corporate governance profile to protect against future misconduct similar to that alleged by the putative stockholder class, a certification of the putative stockholder class, compensatory damages, together with pre- and post-judgment interest, costs and disbursements (including expenses, attorneys’ and experts’ fees), and any other and further relief as is just and equitable.

 

On August 31, 2015, after arms’ length negotiations, the parties reached an agreement in principle and executed a memorandum of understanding providing for the settlement of claims concerning the dividend rate increase term and stockholder vote and related disclosure. The Memorandum of Understanding stated that the Defendants have entered into the partial settlement of the litigation solely to eliminate the distraction, burden, expense, and potential delay of further litigation involving claims that have been settled. Pursuant to the partial settlement, the Company agreed to supplement the disclosures in its definitive proxy statement on Schedule 14A (“Definitive Proxy Statement”), Coliseum and certain of its affiliates and the Company entered into an amendment to that certain Series A Preferred Stock Exchange Agreement, by and among Coliseum Capital Partners, L.P., Coliseum Capital Partners II, L.P., Coliseum Capital Co-Invest, L.P., Blackwell Partners, LLC, and The Providence Service Corporation dated as of February 11, 2015 described in the Definitive Proxy Statement, and the Board of Directors of the Company agreed to adopt a policy related to the Board’s determination each quarter as to whether the Company should pay cash dividends or allow dividends to be paid in the form of PIK dividends on the preferred stock, as further described in the supplemental proxy disclosures. On September 2, 2015, Providence issued supplemental disclosures through a Supplement to the Proxy Statement. On September 16, 2015, Providence stockholders approved the removal of the Caps.

 

 
29

 

 

The settlement provided for, among other things, the release of any claims based on alleged coercion and disclosure related to the stockholder vote on the removal of the Caps. On November 13, 2015, the Court issued an order setting out the schedule related to application for court approval of the proposed settlement and plaintiffs’ counsel’s request for attorneys’ fees and expenses related to the settlement as provided for in the Memorandum of Understanding (“MOU”). The Company provided notice of the proposed partial settlement to Providence’s shareholders by December 11, 2015. At a hearing on February 9, 2016, the court denied approval of the settlement. The Court indicated that plaintiff’s counsel could petition the Court for a mootness fee, and that defendants would have the opportunity to oppose any such application.

 

On January 12, 2016, plaintiff filed a verified amended class action and derivative complaint. In addition to the defendants named in the earlier complaint, the amended complaint names David Shackelton, Coliseum Capital Partners, L.P., Coliseum Capital Partners II, L.P., Blackwell Partners, LLC, Coliseum Capital CO-Invest, L.P. (collectively, and together with Coliseum Capital Management, LLC, “Coliseum”) and RBC Capital Markets, LLC, (“RBC Capital Markets”) as additional defendants. The amended complaint purports to allege direct and derivative claims for breach of fiduciary duty against some or all of the Individual Defendants and David Shackelton (collectively, the “Amended Individual Defendants”) regarding the approval of the subordinated note, the rights offering, standby agreement with Coliseum, and grant to Coliseum of certain stock options. The amended complaint also purports to allege an additional derivative claim for unjust enrichment against Coliseum regarding the subordinated note, the rights offering, and standby agreement with Coliseum, and stock options. The amended complaint further alleges that Coliseum and RBC Capital Markets aided and abetted the Amended Individual Defendants in breaching their fiduciary duties and that demand on the Board is excused as futile. 

 

The amended complaint seeks (a) findings that (i) the Amended Individual Defendants are liable for breaching their fiduciary duties to the Company and the putative stockholder class, (ii) Coliseum and RBC Capital are liable for aiding and abetting such alleged breaches of fiduciary duties, (iii) Coliseum is liable for unjust enrichment, (iv) certain stock options awarded to Coliseum were the product of waste, and (iv) demand on the Board is excused as futile, (b) revision or rescission of the terms of the subordinated note and preferred stock as necessary and/or appropriate, (c) a requirement that the Company reform its corporate governance profile to protect against future misconduct similar to that alleged by the putative stockholder class, (d) certification of the putative stockholder class, (e) compensatory damages, together with pre- and post-judgment interest, costs and disbursements (including expenses, attorneys’ and experts’ fees), and (f) any other and further relief as is just and equitable.

 

 

Item 4.

Mine Safety Disclosures 

 

Not applicable.

 

 
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PART II

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity 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 8, 2016, there were 26 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:

  

   

High

   

Low

 

2015

               

Fourth Quarter

  $ 56.92     $ 41.80  

Third Quarter

  $ 53.49     $ 39.08  

Second Quarter

  $ 55.99     $ 40.52  

First Quarter

  $ 53.60     $ 36.03  
                 

2014

               

Fourth Quarter

  $ 48.70     $ 34.03  

Third Quarter

  $ 49.41     $ 35.70  

Second Quarter

  $ 43.35     $ 28.07  

First Quarter

  $ 29.00     $ 23.91  

  

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, 2010.  

 

 

 

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 on common stock is limited 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.

 

 
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Issuer Purchases of Equity Securities

  

Period

 

Total Number

of Shares of

Common Stock

Purchased (1)

   

Average Price

Paid per

Share

   

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 Program (3)

   

Maximum Dollar Value of

Shares of Common Stock

that May Yet Be Purchased

Under Program (2)

(in thousands)

 
                                         

Fourth quarter:

                                       

October 1, 2015 to October 31, 2015

    751,061     $ 41.23       -       243,900     $ -  

November 1, 2015 to November 30, 2015

    59,818     $ 46.97       54,100       243,900       67,489  

December 1, 2015 to December 31, 2015

    55,481     $ 47.24       55,050       243,900       64,887  
                                         

Total

    866,360     $ 42.01       109,150       243,900     $ 64,887  

 

______________________

 

 

(1)

Includes (i) shares that were acquired from employees in connection with the settlement of income tax and related benefit withholding obligations arising from vesting in restricted stock awards; (ii) common stock retained by us for the payment of the exercise price upon the exercise of stock options; (iii) the repurchase of 707,318 shares of our common stock for approximately $29.0 million that was not subject to a specific plan; and (iv) the repurchase of shares under the repurchase program authorized by the Board of Directors on November 4, 2015. For more information on these repurchases, see Note 12, Stockholders’ Equity, in the notes to consolidated financial statements.

     
 

(2)

On November 4, 2015 our Board of Directors authorized the Company to engage in a common stock repurchase program to repurchase up to $70.0 million in aggregate value of the Company’s common stock during the twelve-month period following November 4, 2015. As of December 31, 2015, we have spent approximately $5.1 million to purchase 109,150 shares of our common stock under this plan.
     
  (3) Our Board of Directors approved a stock repurchase program in February 2007 for up to one million shares of our common stock. Through December 31, 2012, we spent approximately $14.4 million to purchase 756,100 shares of our common stock on the open market under this program. No purchases have been made under the program since 2012. This program was formally cancelled by the Company in January 2016.

 

 
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Equity Compensation Plan Information

 

The following table provides certain information as of December 31, 2015 with respect to our equity based compensation plans.

  

Plan category

 

Number of securities to be issued upon exercise of outstanding options, warrants and rights

   

Weighted-average exercise price of

outstanding options, warrants and rights

   

(a)

Number of securities remaining available for future issuance under equity compensation plans (excluding securities

reflected in column (a))

 

Equity compensation plans approved by security holders (1)

    505,452       $34.84       1,262,626  

Equity compensation plans not approved by security holders

                 

Total

    505,452       $34.84       1,262,626  

 

(1)

 

The number of shares shown in column (a) 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.

  

Item 6.

Selected Financial Data. 

 

We have derived the following selected financial data from the consolidated financial statements and related notes. The information set forth below is not necessarily indicative of future results. 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.

 

 
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Year Ended December 31,

 
      2015 (1)(2)(3)(8)       2014 (1)(4)(5)       2013 (1)(7)(8)       2012 (1)(6)(8)       2011 (1)(9)  
    (dollars and shares in thousands, except per share data)  

Statement of operations data:

                                       

Service revenue, net

  $ 1,695,446     $ 1,136,211     $ 798,766     $ 777,010     $ 623,814  
                                         

Operating expenses:

                                       

Service expense

    1,544,365       1,023,785       736,669       732,242       578,612  

General and administrative expense

    73,616       44,501       25,590       27,011       21,870  

Depreciation and amortization

    53,469       22,833       9,331       9,606       8,716  

Asset impairment charges

    -       -       -       2,506       -  

Total operating expenses

    1,671,450       1,091,119       771,590       771,365       609,198  

Operating income

    23,996       45,092       27,176       5,645       14,616  

Other expenses:

                                       

Interest expense, net

    16,213       13,122       6,921       7,513       10,009  

Loss on extinguishment of debt

    -       -       525       -       2,463  

Equity in net loss of investee

    10,970       -       -       -       -  

Gain on foreign currency transactions

    (857 )     (37 )     -       -       -  

Income (loss) from continuing operations, before income taxes

    (2,330 )     32,007       19,730       (1,868 )     2,144  

Provision for income taxes

    16,276       8,090       6,625       494       77   

Income (loss) from continuing operations, net of tax

    (18,606 )     23,917       13,105       (2,362 )     2,067  

Discontinued operations, net of tax

    101,800       (3,642 )     6,333       10,844       14,873  

Net income

    83,194       20,275       19,438       8,482       16,940  

Net loss attributable to noncontrolling interests

    502       -       -       -       -  

Net income attributable to Providence

  $ 83,696     $ 20,275     $ 19,438     $ 8,482     $ 16,940  
                                         

Diluted earnings per common share:

                                       

Continuing operations

  $ (1.45 )   $ 1.59     $ 0.95     $ (0.18 )   $ 0.15  

Discontinued operations

    5.75       (0.24 )     0.46       0.82       1.12  

Total

  $ 4.30     $ 1.35     $ 1.41     $ 0.64     $ 1.27  
                                         

Weighted-average number of common shares outstanding:

                                       

Diluted

    15,961       15,019       13,810       13,225       13,322  

 

 

   

As of December 31,

 
      2015 (1)       2014 (4)(5)       2013 (7)       2012       2011 (9)  
      (dollars in thousands)  

Balance sheet data:

                                       

Cash and cash equivalents

  $ 84,770     $ 135,258     $ 75,156     $ 26,250     $ 21,840  

Total assets

    1,053,976       1,168,934       425,954       391,737       379,053  

Long-term obligations, including current portion

    303,845       574,613       123,500       130,000       150,493  

Other liabilities

    382,423       372,907       151,817       143,050       119,537  

Convertible preferred stock

    77,576       -       -       -       -  

Total stockholders' equity

    290,132       221,414       150,637       118,687       109,023  

 

 
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(1)

On November 1, 2015, we completed the sale of our Human Services segment. Accordingly, the results of operations and financial condition of our Human Services segment have been presented in discontinued operations for all periods presented.   Included in 2015 is a gain on the sale of the Human Services segment, net of tax, totaling approximately $100.3 million.

   

(2)

The Company incurred approximately $20.9 million of accelerated expense related to restricted shares and cash placed into escrow at the time of the Ingeus acquisition. The shares and cash were placed into escrow concurrent with the payments of the acquisition consideration paid for Ingeus; however, because two sellers of Ingeus remained employees post acquisition, the value of the shares and cash was recognized as compensation expense over the escrow term. Acceleration was triggered when the two sellers separated from the Company. In addition, in 2015 and 2014, respectively, the Company incurred $5.9 million and $4.5 million of expense prior to the separation of these two employees. Benefits of $2.5 million and $16.1 million associated with the reduction in the fair value of Ingeus contingent consideration are included in general and administrative expenses for 2015 and 2014, respectively. 2015 expenses also include $12.2 million of WD Services’ redundancy costs and $2.4 million in Ingeus transaction related expenses, whereas 2014 includes $11.8 million in acquisition costs primarily related to the acquisitions of Ingeus and Matrix.

   

(3)

The loss on equity investments relates to our investment in Mission Providence. Mission Providence began providing services in July 2015 and has incurred substantial start-up and administrative costs to date.

   

(4)

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 affect 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.

   

(5)

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. 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 related party note in the aggregate principal amount of $65.5 million. The unsecured subordinated related party note was repaid on February 11, 2015 with proceeds from the issuance of $65.5 million of convertible preferred stock. 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 within interest expense 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.

   

(6)

As a result of changes in the market environment 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. 

   

(7)

On August 2, 2013, we executed a new credit facility and paid all amounts due under the then 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.

   

(8)

We incurred expense (net of benefit of forfeiture of stock-based compensation) of approximately $0.7 million, $1.3 million and $1.3 million in 2015, 2013 and 2012, respectively for severance and retirement payments related former executive officers and key employees.

   

(9)

On March 11, 2011, we executed a new credit facility and paid all amounts due under the then 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.

 

 
35

 

 

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

 

       Please refer to Item 1. “Business” of this Form 10-K for a discussion of the Company’s services and corporate strategy. The Providence Service Corporation is a holding company that owns and manages diverse operating subsidiaries, comprised of providers of health care and workforce development services to a variety of end markets. Our operations are currently organized into three principal business segments: NET Services, WD Services, and HA Services.

 

Business Outlook

 

Our performance is affected by a number of trends that drive the demand for our services. In particular, the markets in which we operate are exposed to various trends such as government outsourcing and health care cost management. Over the long term, we believe there are numerous factors that could positively drive demand and affect growth within the industries in which we operate, including (i) an aging population, which will increase demand for health care services, (ii) budget pressure on governments, which may increase the use of private corporations to provide necessary services and (iii) care at home, driven by cost pressures on traditional reimbursement models and technological advances enabling remote engagement.

 

Recently, our company has grown through acquisitions, primarily in the WD Services and HA Services segments. Historically, our segments have grown through organic expansion into new markets and service lines, organic expansion within existing markets and service lines, increases in the number of clients served under contracts we have been awarded, the securing of new contracts, and through acquisitions.

 

We continue to selectively identify and pursue the acquisition of attractive businesses that are complementary to our business strategies.

 

Revenues and Expense

 

NET Services

 

We provide non-emergency transportation management services under contracts with state Medicaid and local agencies, hospital systems or private managed care organizations (“MCOs”). Most of our contracts are capitated, which means we are paid on a per member, per month basis for each eligible member. For most contracts, we arrange for transportation of members through our network of independent transportation providers, whereby we remit payment to the transportation providers. However, for certain contracts, we only provide management services, and do not contract with transportation providers for the actual transportation.

 

WD Services

 

We provide workforce development and offender rehabilitation services on a global basis that include employment preparation and placement, apprenticeship and training, and certain health related services, such as employee assistance programs. Our client base for workforce development services is broad and includes long-term unemployed, disabled, and unskilled individuals, as well as individuals that are coping with medical illnesses, are newly graduated from educational institutions, and those that have been released from incarceration. We contract primarily with national government entities that seek to reduce the unemployment and recidivism rates. 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 also earn revenue under fixed fee for service arrangements, based upon contractual rates established at the outset of the applicable contract year, although the rate may be prospectively adjusted during the contract year based upon actual volumes.   We bill according to contractual terms, typically after proof of services have been achieved.

 

 
36

 

 

As described above, when WD Services enters into new markets and service lines, it often experiences significant costs which are expensed as incurred, whereas revenue may not be realized until a later date. As a result, WD Services experiences significant variability in its financial results and, therefore, we believe the results are best viewed over a multi-year perspective.

 

HA Services

 

We contract with health plans to provide CHAs for their MA members that meet certain pre-determined criteria. A CHA is a comprehensive physical examination of an individual performed by one of our nurse practitioners (“NPs”), typically in the home setting. The CHA process is specifically designed to engage and coordinate with the member’s full care network in order to facilitate follow-up care and treatment.

 

In addition to our primary CHA services, we launched a chronic care management offering in 2015. With data provided by our health plan clients, we utilize analytics to determine which members we can most effectively lower healthcare costs and improve outcomes through face-to-face engagements with clinicians. Each program is customized and is served by a comprehensive team of case managers, nurse practitioners, registered nurses, and trained call center colleagues. We anticipate our chronic care management offering to becoming an increasing proportion of HA Services’ revenue over the next 2-3 years.

 

Classification of Operating Expenses

 

Our “Service expense” line item includes the majority of the operating expenses of our segments as well as our captive insurance company, with the exception of certain costs which are classified as “General and administrative expense”, including facilities and related charges and contingent consideration adjustments. Service expense also excludes asset impairment charges and depreciation and amortization expenses. In the discussion below, we present the breakdown of service expense by the following major captions: purchased services, payroll and related costs, other operating expenses and stock-based compensation. Purchased services includes the amounts we pay to third-party service providers and are typically dependent upon service volume. Payroll and related costs include all personnel costs of our verticals, while other operating expenses include general overhead costs of our verticals. Stock-based compensation represents the stock-based compensation expense associated with stock grants to employees of our segments.

 

Our “General and administrative expense” primarily includes the operating expenses of our corporate office, excluding depreciation and amortization, as well as facilities and related charges of our segments and contingent consideration adjustments.

 

Critical Accounting Policies and Estimates

 

Critical accounting policies and estimates are those that we believe are important in the preparation of our consolidated financial statements because they require that we use judgment and estimates in applying those policies. We prepare our consolidated financial statements and accompanying notes in accordance with generally accepted accounting principles in the United States (“GAAP”). Preparation of the consolidated financial statements and accompanying notes requires that we make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the consolidated financial statements as well as revenue and expenses during the periods reported. We base our estimates on historical experience, where applicable, and other assumptions that we believe are reasonable under the circumstances. Actual results may differ from our estimates under different assumptions or conditions.

 

There are certain critical estimates that we believe require significant judgment in the preparation of our consolidated financial statements. We consider an accounting estimate to be critical if:

 

 

 

It requires us to make an assumption because information was not available at the time or it included matters that were highly uncertain at the time we were making the estimate; and

 

 

 

Changes in the estimate or different estimates that we could have selected may have had a material impact on our financial condition or results of operations.

 

For more information on each of these policies, see Note 2, Significant Accounting Policies, in the notes to consolidated financial statements. We discuss information about the nature and rationale for our critical accounting estimates below.

 

 
37

 

 

Transportation Accrual

 

We accrue the cost of transportation expense within NET Services based on the amount we expect to be billed by transportation providers, as we generally only pay transportation providers for completed trips based upon documentation submitted. The transportation accrual requires significant judgment, as the accrual is based upon contractual rates and mileage estimates, as well as a rate for unknown cancellations, as members may have requested transportation but not notified us of cancellation. Based upon historical experience and contract terms, we estimate the amount of expense we expect to incur for invoices which have not been submitted. Actual expense could be greater or less than the amounts estimated due to changes in member or transportation provider behavior.

 

Business Combinations

 

We assign the value of the consideration transferred to acquire a business to the tangible assets and identifiable intangible assets acquired and liabilities assumed on the basis of their fair values at the date of acquisition. Any excess purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill. When determining the fair values of assets acquired and liabilities assumed, management makes significant estimates and assumptions, especially with respect to intangible assets. Critical estimates in valuing certain intangible assets include but are not limited to future expected cash flows from customer relationships and trade names, and discount rates. Management’s estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable and, as a result, actual results may differ from estimates.

 

Recoverability of Goodwill and Indefinite and Definite-Lived Intangible Assets

 

Goodwill. We assess goodwill for impairment annually, or more frequently, if events and circumstances indicate impairment may have occurred. In the evaluation of goodwill for impairment, we typically first perform a qualitative assessment to determine whether it is more likely than not that the fair value of the reporting unit is less than the carrying amount. If so, we perform a quantitative assessment and compare the fair value of the reporting unit to the carrying value. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is potentially impaired and we proceed to step two of the impairment analysis. In step two of the analysis, we will record an impairment loss equal to the excess of the carrying value of the reporting unit’s goodwill over its implied fair value should such a circumstance arise. Periodically, we may choose to forgo the initial qualitative assessment and perform quantitative analysis to assist in our annual evaluation.

 

We may base our measurement of fair value of reporting units the present value of future discounted cash flows, a market valuation approach, or a blended approach. The discounted cash flows model indicates the fair value of the reporting units based on the present value of the cash flows that we expect the reporting units to generate in the future. Our significant estimates in the discounted cash flows model include: our weighted average cost of capital; long-term rate of growth and profitability of our business; and working capital effects. The market valuation approach indicates the fair value of the business based on a comparison of the Company to comparable publicly traded firms in similar lines of business. Our significant estimates in the market approach model include identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment and assessing comparable revenue and earnings before interest, taxes, depreciation and amortization ("EBITDA") multiples in estimating the fair value of the reporting units.

 

In addition to measuring the fair value of our reporting units as described above, we consider the combined carrying and fair values of our reporting units in relation to the Company’s total fair value of equity plus debt and preferred equity as of the assessment date. Our equity value assumes our fully diluted market capitalization, using the stock price on the valuation date. The debt value is based on the highest value expected to be paid to repurchase the debt, which represents the principal of each debt instrument. The fair value of the Company's reporting units were substantially in excess of the carrying value at December 31, 2015.

 

 
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Indefinite-Lived Intangible Assets. We base our measurement of fair value of indefinite-lived intangible assets, which consists of a trade name using the relief-from-royalty method. This method assumes that the trade name has value to the extent that their owner is relieved of the obligation to pay royalties for the benefits received from them. This method requires us to estimate the future revenue for the related brand, the appropriate royalty rate and the weighted average cost of capital.

 

Definite-Lived Intangible Assets. We review the carrying value of long-lived assets or asset groups to be used in operations whenever events or changes in circumstances indicate that the carrying amount of the assets might not be recoverable. Factors that would necessitate an impairment assessment include a significant adverse change in the extent or manner in which an asset is used, a significant adverse change in legal factors or the business climate that could affect the value of the asset, or a significant decline in the observable market value of an asset, among others. If such facts indicate a potential impairment, we would assess the recoverability of an asset group by determining if the carrying value of the asset group exceeds the sum of the projected undiscounted cash flows expected to result from the use and eventual disposition of the assets over the remaining economic life of the primary asset in the asset group. If the recoverability test indicates that the carrying value of the asset group is not recoverable, we will estimate the fair value of the asset group using appropriate valuation methodologies, which would typically include an estimate of discounted cash flows. Any impairment would be measured as the difference between the asset groups carrying amount and its estimated fair value.

 

The use of different estimates or assumptions in determining the fair value of our goodwill, indefinite-lived and definite-lived intangible assets may result in different values for these assets, which could result in an impairment or, in the period in which an impairment is recognized, could result in a materially different impairment charge.

 

Income Taxes

 

We record income taxes under the liability method. Deferred tax assets and liabilities reflect our estimation of the future tax consequences of temporary differences between the carrying amounts of assets and liabilities for book and tax purposes. We determine deferred income taxes based on the differences in accounting methods and timing between financial statement and income tax reporting. Accordingly, we determine the deferred tax asset or liability for each temporary difference based on the enacted tax rates expected to be in effect when we realize the underlying items of income and expense. We consider many factors when assessing the likelihood of future realization of our deferred tax assets, including our recent earnings experience by jurisdiction, expectations of future taxable income, and the carryforward periods available to us for tax reporting purposes, as well as other relevant factors. We may establish a valuation allowance to reduce deferred tax assets to the amount we believe is more likely than not to be realized. Due to inherent complexities arising from the nature of our businesses, future changes in income tax law, tax sharing agreements or variances between our actual and anticipated operating results, we make certain judgments and estimates. Therefore, actual income taxes could materially vary from these estimates.

 

We record liabilities to address uncertain tax positions we have taken in previously filed tax returns or that we expect to take in a future tax return. The determination for required liabilities is based upon an analysis of each individual tax position, taking into consideration whether it is more likely than not that our tax position, based on technical merits, will be sustained upon examination. For those positions for which we conclude it is more likely than not it will be sustained, we recognize the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with the taxing authority. The difference between the amount recognized and the total tax position is recorded as a liability. The ultimate resolution of these tax positions may be greater or less than the liabilities recorded.

 

 

 
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Reinsurance and Self-Insurance Liabilities 

 

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. In addition, the Company 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 and for a maximum potential claim liability based on member enrollment. The Company utilizes independent actuarial reports to determine the expected losses and in order to record the appropriate entries. 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.

 

Revenue Recognition

  

NET Services segment

 

Capitation contracts. The majority of NET Services revenue is generated under capitated contracts with payers where we assume the responsibility of meeting the covered transportation requirements of a specific geographic population based on per-member per-month fees for the number of members in the payer’s program. Revenue is recorded based upon the amount earned per period.

 

Fee for service contracts.  Revenues earned under fee for service (“FFS”) contracts are based upon contractually established billing rates. Revenues are recognized when the service is provided based upon contractual amounts.

 

Flat fee contracts. Revenues earned under flat fee contracts are recognized ratably over the covered service period based upon contractually established fees which do not fluctuate with any changes in the membership population who are eligible to receive the transportation services.

 

For most contracts, we arrange for transportation of members through our network of independent transportation providers, whereby we remit payment to the transportation providers. However, for certain contracts, we only provide management services, and do not contract with transportation providers for the actual transportation.

   

Workforce Development Services segment

 

WD Services revenues are generated from providing workforce development and offender rehabilitation services, both of which include employment preparation and placement, apprenticeship and training, and certain health related services, such as employee assistance programs. While the specific terms vary by contract and country, the Company often 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 is referred by the contracting government entity and the person enters the program, and cover the overall services provided under the program. Job placement fees are typically payable when a client is employed. Job outcome fees are typically payable when a client is employed, and remains employed for a specified period of time. Sustainment fees are typically payable upon certain employment tenure milestones. Incentive fees are generally based upon a calculation that includes a variety of factors and inputs, such as average sustainment rates and client referral rates. Incentive fees vary greatly by contract.

 

Attachment fee revenue is recognized ratably over the period of service, based upon an estimate of the period of time general services will be provided (i.e. the person is placed in a job or reaches the maximum time period for the program). The estimate of the period of time services will be rendered is based upon historical data. Job Placement, Job Outcome and Sustainment Fee revenue is recognized when certain milestones are achieved, and amounts become billable. Incentive Fee revenue is generally recognized when 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.

 

Revenue is also earned under fixed fee for service arrangements, based upon an expected volume of services to be performed. The expected volume of services is generally agreed at the outset of the contract year. Revenue under these contracts may be adjusted prospectively during the contract year, or for future contract years, if actual volumes are below expected levels.

  

 
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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 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

 

Our primary form of employee stock-based compensation is stock option awards and restricted stock, including certain awards which vest based upon performance conditions. We measure the value of stock option awards on the date of grant at fair value using the appropriate valuation techniques, including the Black-Scholes and Monte Carlo option-pricing models. We recognize the fair value, net of estimated forfeitures, as stock-based compensation expense over the remaining term on a straight-line basis. The pricing models require various highly judgmental assumptions including volatility and expected option term. If any of the assumptions used in the models change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.

 

We record stock-based compensation expense net of estimated forfeitures. In determining the estimated forfeiture rates for stock-based awards, we periodically conduct an assessment of the actual number of equity awards that have been forfeited to date as well as those expected to be forfeited in the future. We consider many factors when estimating expected forfeitures, including the type of award, the employee class and historical experience. The estimate of stock awards that will ultimately be forfeited requires significant judgment and to the extent that actual results or updated estimates differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period such estimates are revised.

 

     Restructuring and Related Reorganization Costs 

  

The Company has engaged in employee headcount rightsizing actions within the WD Services segment which require management to estimate the timing and amount of severance and other employee separation costs for workforce reduction. The Company accrues for severance and other employee separation costs under these actions when it is probable that a liability has been incurred and the amount is reasonably estimable. The amounts used in determining severance accruals are based on an estimate of the salaries and related benefit costs payable under existing plans for the number of employees impacted, but the final determination of the actual employees to be terminated is subject to a customary consultation process. The estimate of costs that will ultimately be paid requires significant judgment and to the extent that actual results or updated results differ from our current estimates, such amounts will be recorded as a cumulative adjustment in the period such amounts are determined.

 

 
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Results of operations

 

Segment reporting. Our operations are organized and reviewed by management along our segment lines, which are: NET Services, WD Services, and HA Services. Effective November 1, 2015, we completed the sale of our Human Services segment. The Human Services segment results of operations are separately discussed in the “Discontinued operations, net of tax”, section set forth below.

 

Segment results are based on how our chief operating decision maker manages our business, makes operating decisions and evaluates operating performance. The operating results of the Segments include revenue and expenses incurred by the segment, as well as an allocation of direct expenses incurred by our corporate division on behalf of the segment. Indirect expenses, including unallocated corporate functions and expenses, such as executive, finance, human resources, information technology and legal, as well as the results of our captive insurance company (the “Captive”) and elimination entries recorded in consolidation are reflected in Corporate and Other. Note that in prior periods, the Company reported its segment activities under a full absorption method, where all corporate direct and indirect costs were allocated to the reporting segments. Additionally, the oversight of two legacy businesses was transferred to the management of WD Services in 2015. The segment results for the years ended December 31, 2014 and 2013 have been recast to reflect the current management of the segments.

 

Year ended December 31, 2015 compared to year ended December 31, 2014

 

The following table sets forth results of operations and the percentage of consolidated total revenues represented by items in our consolidated statements of income for 2015 and 2014 (in thousands):

  

   

Year ended December 31,

 
   

2015

   

2014

 
         

Percentage

of Revenue

         

Percentage

of Revenue

 

Service revenue, net

    1,695,446       100.0%       1,136,211       100.0%  
                                 

Operating expenses:

                               

Service expense

    1,544,365       91.1%       1,023,785       90.1%  

General and administrative expense

    73,616       4.3%       44,501       3.9%  

Depreciation and amortization

    53,469       3.2%       22,833       2.0%  

Total operating expenses

    1,671,450       98.6%       1,091,119       96.0%  
                                 

Operating income

    23,996       1.4%       45,092       4.0%  
                                 

Non-operating expense:

                               

Interest expense, net

    16,213       1.0%       13,122       1.2%  

Equity in net loss of investee

    10,970       0.6%       -       0.0%  

Gain on foreign currency transactions

    (857 )     -0.1%       (37 )     0.0%  

Income from continuing operations before income taxes

    (2,330 )     -0.1%       32,007       2.8%  

Provision for income taxes

    16,276       1.0%       8,090       0.7%  

Income (loss) from continuing operations

    (18,606 )     -1.1%       23,917       2.1%  

Discontinued operations, net of tax

    101,800       6.0%       (3,642 )     -0.3%  

Net income

    83,194       4.9%       20,275       1.8%  

Net loss attributable to noncontrolling interest

    502       0.0%       -       0.0%  

Net income attributable to Providence

    83,696       4.9%       20,275       1.8%  

 

 
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Service revenue, net. Consolidated service revenue, net for 2015 increased $559.2 million, or 49.2%, compared to 2014. Revenue for 2015 compared to 2014 includes an increase in revenue attributable to HA Services of approximately $174.1 million, as a result of the acquisition of Matrix on October 23, 2014, as well as an increase in revenue of WD Services of approximately $186.3 million, as a result of the acquisition of Ingeus on May 30, 2014. Additionally, NET Services experienced an increase in revenue of approximately $198.7 million.

 

Total operating expenses. Consolidated operating expenses for 2015 increased $580.3 million, or 53.2%, compared to 2014. Operating expenses for 2015 compared to 2014 included an increase in expenses attributable to HA Services of approximately $154.1 million and an increase in expenses attributable to WD Services of approximately $246.2 million, due primarily to the acquisitions discussed above, and an increase in expense attributable to NET Services of $195.2 million. Partially offsetting these expense increases was a decrease in Corporate and Other expenses of approximately $15.2 million.

 

Operating income. Consolidated operating income for 2015 decreased approximately $21.1 million, or 46.8%, compared to 2014. The decrease was primarily attributable to the decrease in the operating income of WD Services in 2015 as compared to 2014 of approximately $59.9 million. This decrease was partially offset by an increase in HA Services operating income of approximately $20.0 million, increased operating income of NET Services of approximately $3.5 million and decreased expenses for Corporate and Other of approximately $15.3 million.

 

Interest expense, net. Consolidated interest expense, net for 2015 increased approximately $3.1 million, or 23.6%, compared to 2014. The increase is primarily related to the increase in outstanding debt incurred primarily to fund our acquisitions, as well as the amortization of deferred financing fees related to the debt refinancing in October 2014.

 

Loss on equity investments. Loss on equity investments relates to our investment in Mission Providence. Mission Providence began providing services in July 2015 and has incurred significant start-up and administrative costs to date. We record 75% of Mission Providence’s profit or loss.

 

Gain on foreign currency transactions. The foreign currency gain of approximately $0.9 million and $0.04 million for 2015 and 2014, respectively, were primarily due to translation adjustments of our foreign subsidiaries.

 

Provision for income taxes. Our effective tax rate for 2015 exceeded 100%. The effective tax rate exceeded the United States federal statutory rate of 35% primarily due to foreign net operating losses (including equity investment losses) for which the future income tax benefit currently cannot be recognized, significant losses in foreign jurisdictions with tax rates lower than the US rate of 35%, state income taxes, and certain non-deductible expenses, including significant amounts of compensation expense related to two former shareholders of Ingeus who reside in Australia, for which no tax deduction may be claimed. The Company’s effective tax rate for 2014 was 25.3%, due primarily to the reduction in fair value in contingent consideration for the Ingeus acquisition, which is not treated as taxable income.

 

 
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Discontinued operations, net of tax. The following table summarizes the major classes of line items included in income from discontinued operations, net of tax, and the percentage of service revenue from discontinued operations, for 2015 and 2014 (in thousands):

  

   

Year Ended December 31,

 
   

2015

   

2014

 
       $    

Percentage of

Revenue

       $    

Percentage of

Revenue

 

Service revenue, net

    291,510       100.0%       344,960       100.0%  
                                 

Service expense

    264,293       90.7%       315,008       91.3%  

General and administrative expense

    14,975       5.1%       19,134       5.5%  

Asset impairment charge

    1,593       0.5%       6,915       2.0%  

Depreciation and amortization

    4,831       1.7%       6,655       1.9%  

Interest expense, net

    2,829       1.0%       1,478       0.4%  

Income from discontinued operations before provision for income taxes

    2,989       1.0%       (4,230 )     -1.2%  

Gain on disposition

    123,129       42.2%       -       0.0%  

Benefit (provision) for income taxes

    (24,318 )     -8.3%       588       0.2%  

Discontinued operations, net of tax

    101,800       34.9%       (3,642 )     -1.1%  

  

The results above include an allocation of interest expense related to 50% of the net proceeds from the sale of the Human Services segment, which was required to be repaid by the lenders under the credit facility. The $24.3 million provision for income taxes for the year ended December 31, 2015 includes a tax provision of $22.8 million related to the gain on disposition.

 

Net loss attributable to noncontrolling interest. We have minority interests, some of which are in companies that are currently experiencing losses due to start-up costs. As such we have a net loss attributable to noncontrolling interests.

 

Segment Results. The following analysis includes discussion of each of our segments.

   

NET Services

 

NET Services financial results are as follows for 2015 and 2014 (in thousands):

    

   

Year Ended December 31,

 
   

2015

   

2014

 
      $    

Percentage of

Revenue

     

$

   

Percentage of

Revenue

 

Service revenue, net

    1,083,015       100.0%       884,287       100.0%  
                                 

Service expense

    991,659       91.6%       800,454       90.5%  

General and administrative expense

    10,704       1.0%       8,406       1.0%  

Depreciation and amortization

    9,429       0.9%       7,699       0.9%  

Operating income

    71,223       6.6%       67,728       7.7%  

 

Service revenue, net. Services revenue, net for 2015 increased $198.7 million, or 22.5%, compared to 2014. The increase was primarily related to the full year impact of new state contracts which commenced in 2014 in Texas, Maine, Illinois, and Rhode Island; new state and MCO contracts which commenced in 2015 in Florida, California, New York, and Texas; increased membership under state and MCO contracts in New Jersey, Florida, California, Michigan and New York; and higher rates in certain existing markets. The increase in revenue was partially offset by the termination of our contracts in Mississippi and Connecticut partway through 2014.

 

 
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Service expense. Service expense is comprised of the following for 2015 and 2014 (in thousands):

 

   

Year Ended December 31,

 
   

2015

   

2014

 
       $    

Percentage of

Revenue

      $    

Percentage of

Revenue

 

Purchased services

    814,632       75.2%       657,979       74.4%  

Payroll and related costs

    141,669       13.1%       111,212       12.6%  

Other operating expenses

    34,634       3.2%       30,676       3.5%  

Stock-based compensation

    724       0.1%       587       0.1%  

Total service expense

    991,659       91.6%       800,454       90.5%  

  

Service expense for 2015 increased $191.2 million, or 23.9%, compared to 2014. The increase in service expense is primarily attributable to an increase in purchased transportation services due primarily to higher volume. Purchased transportation services as a percentage of revenue increased slightly, primarily as a result of an increase in utilization, including Medicaid expansion members as they become more familiar with the availability of transportation services. Additionally, our payroll and related costs increased for 2015 as compared to 2014 due to additional contracts and increased call volume due to the increased utilization. Our other operating expenses also increased in 2015 as compared to 2014 due to volume, although it decreased slightly as a percentage of revenue.

 

General and administrative expense. General and administrative expenses in 2015 increased $2.3 million, or 27.3%, as compared to 2014, due to increased facility costs resulting from the overall growth of our operations, including the opening of a new call center in Arizona.

 

Depreciation and amortization expense. Depreciation and amortization expenses increased approximately $1.7 million primarily due to the addition of long-lived assets in our expanded call centers. As a percentage of revenue, depreciation and amortization remained constant at approximately 0.9%.

  

WD Services

 

WD Services’ comparative results are significantly impacted due to the acquisition of Ingeus in May 2014. The results presented below include Ingeus for the full-year 2015 as compared to the post-acquisition period in 2014. WD Services financial results are as follows for 2015 and 2014 (in thousands):

 

   

Year Ended December 31,

 
   

2015

   

2014

 
       $    

Percentage of

Revenue

       $    

Percentage of

Revenue

 

Service revenue, net

    395,059       100.0%       208,763       100.0%  
                                 

Service expense

    393,803       99.7%       184,919       88.6%  

General and administrative expense

    29,846       7.6%       (2,072 )     -1.0%  

Depreciation and amortization

    13,776       3.5%       8,406       4.0%  

Operating income (loss)

    (42,366 )     -10.7%       17,510       8.4%  

 

Service revenue, net. Service revenue, net in 2015 increased $186.3 million, or 89.2%, compared to 2014. The increase in 2015 compared to 2014 is primarily related to the inclusion of Ingeus since May 30, 2014, as Ingeus contributed $367.4 million in 2015 compared to $179.3 million in 2014. Additionally, WD Services experienced revenue growth due to a significant new offender rehabilitation program which began in 2015, offset by revenue declines associated with declining referrals and reduced unit pricing under one of its primary employability programs in the United Kingdom. Assuming Ingeus was acquired on January 1, 2014, WD Services revenue in 2014 would have been approximately $361.2 million on a pro forma basis.

 

 
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Service expense. Service expense is comprised of the following for 2015 and 2014 (in thousands):

  

   

Year Ended December 31,

 
   

2015

   

2014

 
       $    

Percentage of

Revenue

      $    

Percentage of

Revenue

 

Payroll and related costs

    249,130       63.1%       105,436       50.5%  

Purchased services

    78,498       19.9%       48,114       23.0%  

Other operating expenses

    45,418       11.5%       27,938       13.4%  

Stock-based compensation

    20,757       5.3%       3,431       1.6%  

Total service expense

    393,803       99.7%       184,919       88.6%  

  

 Service expense in 2015 increased $208.9 million, or 113.0%, compared to 2014. The increase in 2015 compared to 2014 is primarily related to the Ingeus acquisition. Payroll and related costs increased primarily as a result of new headcount for a new offender rehabilitation program. Generally, under new contracts, headcount costs increase as new employees are hired and trained prior to significant revenue being earned, resulting in an increase in payroll and related costs as a percentage of revenue. Payroll and related costs for the year ended December 31, 2015 include approximately $12.2 million in termination benefits primarily related to two redundancy plans designed to better align headcount with service delivery volumes and the impact of utilization of new information technology systems. Certain redundancy costs were anticipated in developing our estimate of costs when bidding for new contracts. The majority of these redundancy benefits are expected to be paid during 2016. Additionally, on October 15, 2015, we entered into Settlement Deeds whereby two Ingeus executives’ (who were also selling shareholders of Ingeus) employment agreements were terminated by mutual agreement. The termination of the employees’ employment agreements resulted in approximately $4.8 million of accelerated compensation expense and $16.1 million in accelerated stock-based compensation from restricted shares and cash placed into escrow in 2014, in conjunction with the payment of acquisition consideration of Ingeus. These amounts would otherwise have been recognized over the four year vesting period, which was scheduled to end in May 2018. In addition, in 2015 and 2014, respectively, the company incurred $5.9 million and $4.5 million of expense prior to termination. WD Services also incurred approximately $2.4 million in other costs associated with the separation with these two employees which is included in other operating expenses in the table above.

 

General and administrative expense. General and administrative expense in 2015 increased $31.9 million compared to 2014. $13.6 million of the increase relates to the impact of the reduction in the fair value of contingent consideration, as the reduction recorded in 2015 was $2.5 million as compared to the reduction in 2014 of $16.1 million. The fair value of the contingent consideration is zero at December 31, 2015. Additionally, facility costs increased $18.3 million, to $32.3 million in 2015 from $14.0 million in 2014 primarily due to the Ingeus acquisition, as well as growth associated with our new programs.

 

Depreciation and amortization expense. Depreciation and amortization expense for 2015 increased approximately $5.4 million compared to 2014, principally attributable to the full year of activity in 2015 for Ingeus.

 

 
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HA Services

 

HA Services comparative results are significantly impacted due to the acquisition of Matrix in October 2014. The results presented below include Matrix for the full-year 2015 as compared to the post-acquisition period in 2014. HA Services financial results are as follows for 2015 and 2014 (in thousands):

  

   

Year Ended December 31,

 
   

2015

   

2014

 
         

Percentage of

Revenue

         

Percentage of

Revenue

 

Service revenue, net

    217,436       100.0%       43,331       100.0%  
                                 

Service expense

    163,211       75.1%       35,185       81.2%  

General and administrative expense

    2,630       1.2%       421       1.0%  

Depreciation and amortization

    29,472       13.6%       5,619       13.0%  

Operating income

    22,123       10.2%       2,106       4.9%  

 

Service revenue, net. HA Services revenue in 2015 increased $174.1 million, or 401.8%, as compared to 2014. The increase was primarily attributable to the inclusion of the results of Matrix for the full year of 2015. Assuming Matrix had been acquired on January 1, 2014, HA Services revenues in 2014 would have been approximately $211.4 million on a pro forma basis. In addition to the impact due to the acquisition, the increase was also due to increased volume offset by a slight decline in pricing.

 

Service expense. Service expense is comprised of the following for 2015 and 2014 (in thousands):

  

   

Year Ended December 31,

 
   

2015

   

2014

 
       $    

Percentage of

Revenue

         

Percentage of

Revenue

 

Payroll and related costs

    132,939       61.1%       27,571       63.6%  

Purchased services

    1,305       0.6%       356       0.8%  

Other operating expenses

    28,859       13.3%       7,258       16.8%  

Stock-based compensation

    108       0.0%       -       0.0%  

Total service expense

    163,211       75.1%       35,185       81.2%  

   

Service expense in 2015 increased $128.0 million compared to 2014 due primarily to the Matrix acquisition.

 

General and administrative expense. General and administrative expense in 2015 increased $2.2 million compared to 2014 due to increased facility costs, which were approximately $2.6 million and $0.4 million for 2015 and 2014, respectively.

 

Depreciation and amortization expense. Depreciation and amortization expense in 2015 increased $23.9 million compared to 2014. Depreciation and amortization includes approximately $26.1 million and $5.0 million of amortization of intangible assets acquired in the Matrix acquisition for 2015 and 2014, respectively.

 

 
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Corporate and Other

 

Corporate and Other includes the headcount and professional service costs incurred at the holding company level, the Company’s captive insurance company, and elimination entries to account for inter-segment transactions. Corporate and Other financial results are as follows for 2015 and 2014 (in thousands):

  

   

Year Ended December 31,

 
   

2015

   

2014

 
    $     $  

Service revenue, net (a)

    (64 )     (170 )
                 

Service expense (a)

    (4,308 )     3,227  

General and administrative expense

    30,436       37,746  

Depreciation and amortization

    792       1,109  

Operating loss

    (26,984 )     (42,252 )

 

 

(a) Negative amounts are present for this line item due to elimination entries that are included in Corporate and Other. Offsetting amounts are reflected in the financial results of our operating segments.

 

Operating loss. Corporate and Other operating loss in 2015 decreased by approximately $15.3 million as compared to 2014, due primarily to decreased expenses. Service expense for 2015 decreased $7.5 million as compared to 2014 due to favorable claims history in 2015 for our self-insurance and reinsurance programs, as well as a decrease in certain payroll and related costs of $3.8 million primarily due to positions eliminated in 2014.

 

General and administrative expenses in 2015 decreased approximately $7.3 million, or 19.4%, compared to 2014. The decrease was primarily related to a decrease in acquisition costs of approximately $11.2 million, which were incurred in relation to the acquisitions of Ingeus and Matrix. Additionally, the year ended December 31, 2014 included approximately $3.0 million in financing fees associated with the debt refinancing completed in October 2014. Offsetting these decreases in expenses were increased legal fees in 2015 as compared to 2014, of which approximately $0.8 million related to legal fees associated with a putative stockholder class action derivative complaint. Additional increases in general and administrative expenses related to additional accounting and compliance related fees, recruiting, professional fees and payroll related costs of approximately $5.2 million due primarily to increased costs to integrate Ingeus and Matrix into our internal controls program as well as increased audit costs related to the new companies acquired. We also incurred expense attributable to stock award modifications in the amount of approximately $0.7 million related to a separation agreement with our former Chief Executive Officer. In addition, in 2015 we incurred approximately $1.4 million in general and administrative expense related to a new stock-based long-term incentive plan designed to provide long-term performance based awards to certain executive officers of Providence.

 

 
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Year ended December 31, 2014 compared to year ended December 31, 2013

 

The following table sets forth results of operations and the percentage of consolidated total revenues represented by items in our consolidated statements of income for 2014 and 2013 (in thousands):

   

   

Year Ended December 31,

 
   

2014

   

2013

 
         

Percentage

of Revenue

         

Percentage

of Revenue

 

Service revenue, net

    1,136,211       100.0%       798,766       100.0%  
                                 

Operating expenses:

                               

Service expense

    1,023,785       90.1%       736,669       92.2%  

General and administrative expense

    44,501       3.9%       25,590       3.2%  

Depreciation and amortization

    22,833       2.0%       9,331       1.2%  

Total operating expenses

    1,091,119       96.0%       771,590       96.6%  
                                 

Operating income

    45,092       4.0%       27,176       3.4%  
                                 

Non-operating expense:

                               

Interest expense, net

    13,122       1.2%       6,921       0.9%  

Loss on extinguishment of debt

    -       0.0%       525       0.1%  

Gain on foreign currency transactions

    (37 )     0.0%       -       0.0%  

Income from continuing operations before income taxes

    32,007       2.8%       19,730       2.5%  

Provision for income taxes

    8,090       0.7%       6,625       0.8%  

Income from continuing operations

    23,917       2.1%       13,105       1.6%  

Discontinued operations, net of tax

    (3,642 )     -0.3%       6,333       0.8%  

Net income

    20,275       1.8%       19,438       2.4%  

  

Service revenue, net. Consolidated service revenue, net for 2014 increased $337.4 million, or 42.2%, compared to 2013. 2014 includes an increase in revenue attributable to the 2014 acquisitions of Ingeus and Matrix of $179.3 million and $43.3 million, respectively. Additionally, NET Services experienced an increase in revenue of approximately $114.0 million.

 

Total operating expenses. Consolidated operating expenses for 2015 increased $319.5 million, or 41.4%, compared to 2013. 2014 includes an increase attributable to Ingeus and Matrix of $164.1 million and $41.2 million, respectively. Additionally, NET service expense increased $89.7 million in 2014 as compared to 2013 and Corporate and Other operating expenses increased $23.5 million.

 

Operating income. Consolidated operating income for 2014 increased approximately $17.9 million, or 65.9%, compared to 2013. The increase was attributable to the addition in 2014 of Ingeus’s operating income of $15.1 million and Matrix’s operating income of $2.1 million. Additionally, NET Services experienced an increase in operating income of $23.4 million. These increases in operating income were partially offset by the increase in operating loss for Corporate and Other of $23.5 million.

 

Interest expense, net. Consolidated interest expense, net for 2014 increased $6.2 million, or 89.6%, compared to 2013 due to an increase in debt. Current and long-term debt obligations increased to $575.2 million at December 31, 2014, from $123.5 million at December 31, 2013. In addition, interest expense includes $4.5 million of financing fees which were fully expensed in the fourth quarter of 2014 in relation to bridge financing commitments.

 

Gain on foreign currency transactions. The gain on foreign currency of approximately $0.04 million for 2014 resulted primarily from translation adjustments of 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.

 

 
49

 

 

Provision for income taxes. Our effective tax rate for 2014 and 2013 was 25.3% and 33.6% 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.

 

Discontinued operations, net of tax. The following table summarizes the major classes of line items included in income from discontinued operations, net of tax, and the percentage of service revenue from discontinued operations, for 2014 and 2013 (in thousands):

 

   

Year Ended December 31,

 
   

2014

   

2013

 
         

Percentage of

Revenue

         

Percentage of

Revenue

 

Service revenue, net

    344,960       100.0%       323,916       100.0%  
                                 

Service expensez

    315,008       91.3%       283,382       87.5%  

General and administrative expense

    19,134       5.5%       23,043       7.1%  

Asset impairment charge

    6,915       2.0%       492       0.2%  

Depreciation and amortization

    6,655       1.9%       5,541       1.7%  

Interest expense, net

    1,478       0.4%       (27 )     0.0%  

Income from discontinued operations before provision for income taxes

    (4,230 )     -1.2%       11,485       3.5%  

Provision for income taxes

    (588 )     -0.2%       5,152       1.6%  

Discontinued operations, net of tax

    (3,642 )