Res-Care, Inc. Q3 2008 Earnings Call Transcript

| About: Res-Care Inc. (RSCR)

Res-Care, Inc. (RSCR) Q3 2008 Earnings Call Transcript November 6, 2008 9:00 AM ET

Executives

Derwin Wallace – Director of Investor Relations

Ralph Gronefeld – President and Chief Executive Officer

David Miles – Chief Financial Officer

Analysts

Kevin Ellich [ph]

Nathan Yates – Avondale Partners

Jim Macdonald – First Analysis

Newton Juhng – BB&T Capital Markets

Greg Williams – Sidoti & Company

Richard Close – Jefferies

Kevin Ellich – RBC Capital Markets

Steve O'Neil – Hilliard Lyons

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the ResCare third quarter earnings conference call. (Operator instructions) As a reminder this conference is being recorded today, Thursday, 6 of November 2008. I would now like to turn the conference over to Mr. Ralph Gronefeld, President and Chief Executive Officer. Please go ahead sir.

Ralph Gronefeld

Good morning Wayne [ph]. Good morning and welcome to the conference call reviewing ResCare's results for the third quarter and nine months ended September 30, 2008. I am here today with David Miles, our Chief Financial Officer, and Derwin Wallace, our Director of Investor Relations, who will now present our forward-looking statement.

Derwin Wallace

We provided notice of this call in a public news release, and we welcome those joining us through the simulcast web transmission. Our third quarter 2008 earnings release has been distributed to the financial media, filed with the SEC, and are posted to our web site rescare.com.

From time to time, ResCare makes forward-looking statements in its public disclosures, including statements relating to expected financial results, revenues that might be expected from new or acquired programs and facilities, its development and acquisition activities, reimbursement under federal and state programs, compliance with debt covenants and other risk factors, and various trends concerning privatization of government programs.

In our filings under the federal securities laws, including our annual, periodic, and current reports, we identify important factors that could cause ResCare's actual results to differ materially from those anticipated in forward-looking statements. Please refer to the discussion of those factors in our filed reports. We also would note that the information being provided today is as of this date only and that ResCare does not assume any responsibility to update those forward-looking comments. Ralph.

Ralph Gronefeld

Thank you, Derwin. Despite a weak economic environment demand for our services is steady. Rates remain stable and we continue to strengthen the company by expanding our services to more people. ResCare’s leadership is experienced in working difficult reimbursement and regulatory environments.

As a result, the third quarter financial results were solid and we remain on track to achieve our financial targets for the full year. Early in the third quarter we continued to take advantage of opportunities by acquiring Caregivers Home Health.

This acquisition adds $20 million in revenue and expands of diversification efforts in home care services. We’re excited about our long-term growth opportunities in this area and pleased to report that we’re continuing to evaluate opportunities for additional home care service acquisitions.

Year-to-date we have completed 15 acquisitions with annualized revenues of $70 million. Also of note this quarter our Excel Schools and educational operations won 3 significant contracts in Louisiana takeover operations of schools that had failed to meet the safe performance standards.

Just recently the Monroe City Schools' ResCare program was noted by the Louisiana department of education as one of the top new alternative programs in this state. All 3 programs are receiving high marks from teachers, students and school boards. In just a few months we are already having positive impact.

After the quarter, we announced the acquisition of Care Resources, Inc with operations n Maryland, Arizona, and Washington D.C. Care Resources is staffing Services Company for all levels of educational, therapeutic, nursing, and technical support to suit the special needs in public and private schools, hospitals, and private clinics or homes. It will be managed through our education services segment and is expected go generate approximately $13 million in revenue.

Also I want to take this moment to salute our disability services staff in Louisiana, Texas, for their heroic actions during the recent hurricanes. More than 600 people were evacuated from and then returned to their homes without significant instance. Staff members worked without rest to ensure the health and safety of the people we serve. Their dedication is remarkable and we are very lucky to have such caring employees.

Thanks to them for all they do everyday. I have to say we’ve never seen the kind of impact we experienced with Hurricane Ike. Ike had a significant impact on operations in nine states where residents suffered through power outages, gasoline shortages, and property damage. The length of time before things began to return to normal was significant. Three of the state’s hardest hit were Georgia, Florida, and North Carolina, our largest home care states. The gas shortages contributed to delays in growth of our home care operations making it difficult to add new clients because caregivers could not reach them.

Turning to the current economic situation, it is no surprise that many companies deriving revenues from government funding sources are asked [ph] if the deteriorating state reimbursement environment is affecting their business. Our answer is that we take any threat to our business and the populations we serve very seriously. In our 35 history we have faced many such challenges. We have always emerged stronger and better prepared. We are practiced and we’re very aware of our potential exposure. Well in advance we took actions to mitigate our risk.

To protect company assets, improve profitability, and spread operational risks we are growing and diversifying our business. We’re still very conservative in our use of cash. Year-to-date we have declined acquisitions totaling $1.3 billion in annualized revenue because it did not meet our stated objectives. And yet our pipeline remains robust. Our growth is important but not at any cost.

We have years of experience navigating in a low rate environment and maintaining margins. We will continue to control costs and maintain a culture of physical discipline throughout the company. We’re proactive at the state level educating payers about the importance of our business and the people we serve. Ignoring or shortchanging these fragile populations is just not an option.

In order to continue providing high quality services it is even more essential to strengthen and support our care givers, who are our most important assets. We continue to mitigate our risk in a difficult budget environment. We have experienced a stable business model, limited debt, and solid lender commitments and support. We generate significant free cash flow and have the ability to fund our operations and grow strategically for the foreseeable future.

Now, turning to the third quarter results.

Revenues for the third quarter of 2008 increased 6.4% over the prior year period to $387.9 million. Regardless of the challenging environment we continue to grow revenues. I’m proud to announce that this quarter was the 67th consecutive quarter, a period over 16 years, in which revenues increased over the prior year period. The third quarter revenue increase was primarily due to the acquisitions into new services and international segments plus new contracts and improved performance in our existing contracts in the employment training services segment.

Income from continuing operations was $11.6 million or $0.35 per diluted common share for the third quarter of 2008, compared to $11.5 million or $0.34 per diluted share in the prior year period. We are providing guidance for the fourth quarter of 2008 of diluted earnings per common share in the range of $0.35 to $0.38 and revenues $390 million to $410 million.

Now, I’d like to turn the call over to David. David.

David Miles

Thank you Ralph. Before I discuss our financial results for the quarter, I’d like to note that all our comments make reference to EBITDA, a non-GAAP measure. A description of this non-GAAP measure can be found on the investor’s relations section of our corporate website.

Revenues for the third quarter of 2008 increased 6.4% over the prior-year period to $387.9 million. As Ralph stated earlier, this increase was due to acquisitions in community services and international segments, new contracts and improved performance in other existing contracts in the employment training services segment. Income from continuing operations was $11.6 million, or $0.35 per diluted common share, compared with income from continuing ops of $11.5 million or $0.34 per diluted common share in the prior year period. EBITDA for the third quarter of 2008 was $28.3 million versus $28 million in the same period last year.

In the third quarter of 2008, diluted earnings per common share from discontinued operations was a net loss of $0.01. The company recorded share-based compensation expense for the third quarter of 2008 of $1.3 million or $0.03 per diluted common share, compared with $1 million or $0.02 per diluted common share in the same period last year.

The effective income tax rate for the third quarter 2008 was 35.9%, versus 36.7% in the third quarter of 2007.

Our community services group reported revenues for the third quarter of $282.6 million, up from $270.4 million last year. The 4.5% increase was primarily due to the impact of acquisitions. Operating income for the community services group was $30.2 million, a margin of 10.7% for the third quarter of 2008 compared with $27.7 million a margin of 10.2% a year ago. The 50-basis point improvement in margin was due primarily to the integration of Kelly Home Care and lower insurance costs. Operating income includes depreciation and amortization attributable to the operations.

Job Corps Training Services revenues for the quarter were $40 million, remaining consistent with the prior year period of $40.1 million. Operating income for Job Corps was $3 million, and operating margin was 7.4% in the third quarter of 2008, compared with operating income of $2.9 million and margin of 7.2% in the prior year period.

Employment Training Services revenues were $55.1 million, compared with $50.9 million in the third quarter of 2007. The 8.3% increase was primarily due to new contracts and improved performance in the other existing contracts. Operating income was $5.2 million for the quarter compared with $6 million in the prior year period. Operating margins decreased 230 basis points to 9.5% compared with 11.8% in the prior year. On a comparative basis the margin last year was unusually high due to the timing of performance incentives. For the remainder of the year, we expect margins to normalize in the 9% to 10% range.

The other segment, which includes alternative education and international operations posted revenues of $10.2 million, compared with $3.3 million in the 2007 period. The significant increase in revenue was primarily due to late 2007 acquisitions of Maatwerk and Biscom. Revenues from our international operations were $6.6 million during the quarter with break even contribution due to continued integration and startup costs.

Other segment operating margin in the third quarter 2008 was a negative 6.7% due to schools being out of session. We expect margins for the remainder of the year to be at break even as we continue to integrate our international operations.

For the company as a whole, net interest expense for the third quarter was $4.5 million compared with $4.7 million last year. Corporate, general, and administrative expenses for the third quarter were $15 million or 3.9% as a percentage of total revenue compared with $13.2 million or 3.6% of total revenues in the third quarter of 2007.

Cash provided from operations for the quarter totaled $15.7 million, and we closed the quarter with cash of $14.3 million. Total capital expenditures were $4.8 million for the third quarter of 2008, consistent with our plan, and days sales outstanding were 50.4 days at September 30, 2008.

That completes our prepared remarks. Will you please open the call to questions?

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from the line of Kevin Ellich [ph]. Please go ahead.

Kevin Ellich

Hi, good morning guys. Thanks for taking my questions.

Ralph Gronefeld

Good morning Kevin.

Kevin Ellich

Ralph, first of all I was wondering if you could comment about the economic impact on the business and what you are seeing from the state funding or government funding side of the business?

Ralph Gronefeld

Well for 2008 as I mentioned in the last call the rate environment is really in our rearview mirror. States (inaudible) decision about their budgets going through end of 2009. Again it doesn’t mean that at some point they are going to call a special session and look at doing something different, cutting rates or cutting services, but we have got no indication of that at this point in time. We understand that states are having financial difficulties. In the last report that I’ve seen a recently I think 39 of the 52 states are having budgetary shortfalls. We continue to work hard at the grassroots level to make sure that legislatures and folks within the state understand, our customers understand the needs for our services in the populations that we serve. We will continue to do that. We continue to be proactive in monitoring this situation and as we see indications that our services are being mentioned in any way either through our provider associations or through our lobbying efforts or through our operations we make contact again to help educate and to make sure folks understand the impact that it would have on our services and the quality of services and the people of the state are responsible to support.

So where we are right now is where we thought we would be from a rate environment standpoint for 2008. 2009 as is not as clear. But at the current time we have got no indication that we’re going to see any significant other rate reductions at this time. But we also don’t believe we’re going to see any significant rate increases. So, we’re kind of in that flat range again for our second year and as soon as we get more visibility or clarity and we’ll be more than happy to update you folks. But right now it is business as usual in just making sure that we continue to communicate and listen and be proactive in making sure that payer sources understand our services and how important they are.

Kevin Ellich

Okay, and then can you reminder us in past downturns when states have been facing big budget shortfalls how has your business fared. Have you guys done okay or you received reductions in the past.

Ralph Gronefeld

We have received reductions in the past but we have done okay. And we’re actually positioned much better today than we have been in the past to do okay. In the past as states had budget issues and they make the determination they need to cut their funding. Then that funding cut is across the board to all providers. And what that does it puts pressure on the smaller providers to try to meet their financial obligations and it can become difficult for them because they don’t have the capital, they don’t have the size, they don’t have the synergies for our size, and the strong balance sheet to manage through those tough waters. So that becomes an opportunity for us as we saw back in 2002, 2003 for us to increase our tuck ins. And as we know from experience that the tuck ins integrate extremely well. They’re accretive on day one. They have high returns on investment to our shareholders. And so that is an area that we see will continue to improve as the climate continues to worsen or even maintain the same. I think that we just haven’t seen the bubble yet but I think that we will as we move through the next few quarters. The second area that is an advantage to us is that the workforce availability. As more and more people lose their jobs in ResCare we currently hire about 1800 folks a month – a quarter not a month. Those folks are available to come to work for us and to fill staff vacancies reduce our overtime and those types of things. So that is also an advantage.

We’ve expanded into employment training services. Their job is to train people how to work. So we will see that need continue to improve and increase. And we suspect that hopefully the funding will follow those increases. So I think we’re positioned well to – I wouldn’t call so as to be defensive these economic times but to take advantage of the opportunities that exist because of the timing and the environment.

Kevin Ellich

Okay, thanks, and then just going back here to the prepared remarks about the hurricane Ike impact especially in Georgia, Florida and North Carolina on the home care business. Can you guys quantify or is there a way to think about how much that impacted the business?

Ralph Gronefeld

We have had a difficult time during that Kevin because we’re talking about growth that we didn’t get. We know what our targets were. While we have been sure of those targets without the hurricanes because of the fact of the discretionary income that folks are having has gone down a little bit. We also noted we would have seen some growth. Because we know there are situations where we just couldn’t send staff out because they couldn’t get gas for their cars. So I think it is very difficult to quantify maybe you get a call in which maybe two hours of service and the two hours of service may turn into a long-term engagement and relationship with that customer. And so I’m not sure we could quantify those and I know that did impact us somewhat.

David Miles

And Kevin, – Kevin this is David, I’m sorry but on the cost side of things most of the costs that we incurred are covered by insurance.

Kevin Ellich

Okay, and then just one last question on the home care side, can you remind us what percent of your agencies or locations are Medicare certified and have you given any thought in terms of expanding or pushing forward on the traditional Medicare home health business?

Ralph Gronefeld

Kevin I think where we’re right now is about 20% to 25% of our locations are Medicare certified. Where we are is we want to have a balanced model. We want to have a balanced model from a standpoint of payer sources, private pay, Medicaid, and Medicare. You have seen what happens when Medicare rates get cut across the board and that can happen at the Fed level and opposed to Medicaid cuts happening at each state level. And so what we want to do is we want to continue to diversify the risk but understand that those services are important. Understand that those services are important from a continuing of care model for the people that we support and understand that they’re important from a diversification of revenue standpoint, diversifying our risk. And so we want to keep it balanced. We don’t want to get too heavy on Medicare, as we don’t want to get too heavy on Medicaid on the home care side and continue to kind of balance between the three payer sources.

Kevin Ellich

Excellent. Thanks guys.

Ralph Gronefeld

Thank you.

Operator

Our next question comes from the line of Kevin Campbell of Avondale Partners. Please go ahead.

Nathan Yates – Avondale Partners

Good morning. This is actually Nathan sitting in for Kevin.

Nathan Yates – Avondale Partners

I want to start by maybe just getting a little bit more detail on the sequential decline in ETS revenues and maybe aside from the exclusion of the incentive payments what was driving that, if there was any difference there.

Ralph Gronefeld

Well, there wasn’t hell a lot of difference between the incentive payments. That was the main driver of the reduction in revenues. Again, as we communicated about employment training, it is going to be choppy. It is going to be choppy because of the incentive payments, it is going to be choppy because of startups, of new contracts, winding down of old contracts but from our standpoint we did improve revenues over the prior year quarter of about 8%. We’re winning contracts that are much better rate than we are losing contracts. Our rebids, on our rebids we won about 86% of our contracts on rebids. And we have seen some losses of contracts which we didn’t run the bid on in Florida as Florida has moved some of their workforce programs back in-house and providing those services for the state. And that may be the difference that you are alluding to. We did see some of that in the third quarter but again overall we’re pleased with employment training, the growth in employment training. Our (inaudible) rate on both new bids and existing bids and these existing contracts continued to do extremely well. So all in all we’re very positive about our results.

Nathan Yates – Avondale Partners

Can you quantify I guess the growth of the new contract annual revenues that you are expecting?

Ralph Gronefeld

Yes, we have won 25 bids on new contracts with annual revenues of about $33 million.

Nathan Yates – Avondale Partners

$33 million. Okay, all right. And then moving on to the Job Corps segment could you maybe talk a little bit about the improvement in margins. You know, on the last call you said you expected margins to be in the 6.5% to 6.9% range. Have those expectations changed?

Ralph Gronefeld

No not really. Job Corps is a management contract. The management fee is going to say the same. The margin is driven by costs and how that cost basically (inaudible) the revenue. So it was a quarter where the cost was not as high as maybe as we anticipated which would have been in there since driven that revenue and driven the margin down. So we still think that is where we’re going to end up based on the spending that we do in the Job Corps centers.

Nathan Yates – Avondale Partners

Great. And then lastly maybe you could talk a little bit about the proposed Medicaid bailout package that is being discussed currently and how that might impact the business.

Ralph Gronefeld

Well, we’re watching it and as far as I think it is going to come out as part of the stimulus package. Whether that happens here preJanuary, before the new administration takes over or not we are not sure of the timing of it. We’re actively involved in monitoring it and making sure that our voice is heard as far as what types of things may be able to go in that package to help the people that we support. And again it is pretty – it is kind of early stages as far as what really is going to be in the bill to assist states with their Medicaid shortfalls.

Nathan Yates – Avondale Partners

Great. Thank you very much.

Ralph Gronefeld

Thank you.

Operator

Our next question comes from the line of Jim Macdonald of First Analysis. Please go ahead.

Jim Macdonald – First Analysis

Good morning guys.

Ralph Gronefeld

Good morning Jim.

Jim Macdonald – First Analysis

Going back to the EDS. Can you talk a little bit about where you are in ramping the new contracts? How much do you have been sort of in backlog there?

Ralph Gronefeld

It is difficult [ph] quantify but as far as ramping them up, for the most part you have got two large contracts Indiana and Arizona, which we talked about in the past that are still in that growth area. And as we have talked before we anticipate with Indiana being at the final run rate in the fourth quarter of this year. We still believe that that is going to occur to the first quarter of next year. Arizona is going to be a little later than in the first quarter or the second quarter of next year is what we’re anticipating on those large contracts. The rest of them are kind of smaller in nature. They have some impact, you know, between the difference between the winding down of some that you loose and the winding up of those that you win. I am assured it is truly really material in the numbers as we sit today. Some of the contracts that we have won started right up in the run rate. Good thing to have the contracts written. So those are still the big drivers as far as the ramping up of our contracts Jim.

Jim Macdonald – First Analysis

Okay, and on your recent acquisition of Care Resources given all the other obviously acquisitions you are looking at, could you talk a little bit about why that fits into your plan?

Ralph Gronefeld

Yes, we are very exited about that acquisition. It does a couple of things for us. One based on our experience and the success that we have had with our Excel School programs that allows us to when we go out and bid for those types of projects and programs it allowed us to add another opportunity to solve our customers problems as far as bringing some therapeutic services to those kids. And it just strengthens our ability to win new awards by having that additional service available. Also it is an opportunity for us to grow that service alone in other education settings that we currently are not providing to those districts and into those school boards. (inaudible) there is no appropriate for us to develop some synergies between community services groups because these services currently community services are buying outside of the company. And there is an opportunity for us to maybe buy those therapeutic services from ResCare itself. And so we’re looking at that as well. So we’re very excited about it. I think it is a good extension of our current model. I think it fits in our core competencies and as with pharmacy and the rest of the share I think it is just a natural extension of ways that we can see using ancillary businesses to support our core businesses that we are already operating.

Jim Macdonald – First Analysis

And as the primary player a little bit different as it come out of more an education budget?

Ralph Gronefeld

Education budgets, school boards, county dollars it is a different payer source, which is another thing that we’re excited about from a diversification standpoint.

Jim Macdonald – First Analysis

Okay, thanks very much.

Ralph Gronefeld

Thank you.

Operator

Our next question comes from the line of Newton Juhng of BB&T Capital Markets. Please go ahead.

Newton Juhng – BB&T Capital Markets

Thank you very much. Good morning gentlemen. I was curious about the other segment, just the operating margin being where it was. Understanding that you’re still trying to ramp up that international business, it is not quite giving you what you're hoping for in the future. But can you just give us a little bit more detail as to how that is kind of a rolling and should we expect that as we turn into the new year that might turn to a better operating margin on that front.

Ralph Gronefeld

Well. First of, there are two issues driving the margin in the third quarter. The first is seasonality. Seasonality of education, the back-to-school is out during the summer but that will always be the case with our education business in the third quarter. Talking about international, first off I would tell you that operationally we improved during the third quarter. That is offset by our continued move towards strengthening the infrastructure and adding cost and position to that infrastructure to make sure that it is a viable business for us from a support function. And so we’re very pleased with two things in the third quarter. First is that we did see the operations itself improve and two that we did move closer to integrating and getting the talent in that we need to make this a business that we can grow in the future. We are going to see that same type issue occur in the fourth quarter. But at the same time we’re starting to see opportunities for growth, we’re starting to get our name out there, which is one of the reasons for our recent announcement for branding those services, Biscom to PeopleServe. We’re getting ready to ramp up and look at opportunities to bid on and win new contracts. So we’re really in a position where I think we position ourselves well. As I mentioned on the last call it is behind. We didn’t get there as quickly as we had liked. We’re overly aggressive and overly optimistic on our ability to get there. But we’re moving in the right direction and I think that we’re going to see those programs turn the beginning part of next year moving into the second quarter.

Newton Juhng – BB&T Capital Markets

Okay, so would you describe it as being at run rate by the second quarter or is that going to be a small rollover over the course of the year?

Ralph Gronefeld

It is going to be a small rollover. It won’t ramp up that quick to be at that run rate. It will be a slow rollover. But I think we will flip it sometime between the first and second quarter and start providing positive results to the – to the company.

Newton Juhng – BB&T Capital Markets

Okay, and then just on your new guidance here for the fourth quarter. It looks like the revenues assumption is being taken down quite a bit. But bottom line impact not really making too much there because you just kind of haircut the top end a little bit. How should we be looking at that going forward in terms of your ability to mitigate lost revenue and still be able to reach bottom line expectations?

Ralph Gronefeld

Well we haven’t had any lost revenue. We just haven’t had the growth that they anticipated. So it is not a lost revenue situation. It is more of a growth. And the growth is driven by a couple of things. The first is the organic growth is slower than we anticipated, when we first announced the guidance back last December. The second is that the acquisition growth is less than anticipated. Part of the acquisition growth is that we’re as I mentioned in my statements that we are pretty selective and we have actually gotten more selective with the credit crunch that is occurring during the last five weeks. You know cash is king. We want to make sure we are very conservative with our cash and so it really looking at acquisitions that fall into our sweet spot that have little to no integration risk and yet high returns on investments such as the tuck in, such as the home care piece, and those types of things. While at the same time that we see a Care Resources come our way, that really make sense to expansion of our services model, then we will do that. So you know, I think that because of that – that is part of the reason why you’re seeing the margins not being hurt is because we’re being a little bit more selective. We are not taking on a little bit more risk. We’re taking on less risk. And we’re being more conservative with our cash. On a go forward basis, I would tell you that in order to maintain margins we have to grow our business. When you’re not getting rate increases the only way to offset increased cost is through growth. And we understand that in our business model. We understand that we get that margin, we maintain margins and we get that margin improvement by leveraging our indirect costs through growth and we will continue to focus on that.

So we’re not losing business. We’re continuing to grow. We’re very pleased with our growth rate where it is right now in the current economic environment and we’re also very pleased with our ability to manage the bottom line and manage our costs. And be physically responsible in that process.

Newton Juhng – BB&T Capital Markets

Okay, thanks very much for the comments.

Ralph Gronefeld

Thank you.

Operator

Our next question comes from the line of Greg Williams of Sidoti & Company. Please go ahead.

Greg Williams – Sidoti & Company

Good morning guys. Thanks for taking my call.

Ralph Gronefeld

Good morning Greg.

Greg Williams – Sidoti & Company

Thanks. Can you talk a little meant more about the Florida ETS business going in-house may be what happened there and the size of the business?

Ralph Gronefeld

Yes. Basically what happened was it was mid-year, Florida passed a legislation that was signed by the governor that allowed the State of Florida through the Workforce Investment Board to basically unprivatize their workforce business and move it back in-house. Some of our customers, some of the boards have decided to do that. I think it is 5 contracts, some of them range from $10 million to $13 million in revenues that has moved in-house. We still got about half as much or the same amount of money out there as far as current business and it is a choice that these boards have that they have to make. And five have chosen not to and so far and the others the other ones have not. And we continue to do a good job and we did a good job for those five that made that decision. That decision was basically no more than a cost savings move by the state. And we actually think that will come back to us because there was reasons they privatized the first time and that has to do with outcomes and we think that ultimately that pendulum will swing back. This is not an easy thing for states to do because in the reality it kind of goes against the Workforce Investment Act. And so they are actually at some risk with the Federal government by making this move. And so we don’t see this as something that is going to – just all states decide to do by any stretch of the imagination. And again we think that ultimately this is a short term move by Florida and that they will once again for the same reason they chose to do it previously is that they’re in better position when they really need to privatize these services.

Greg Williams – Sidoti & Company

Okay thanks for that color. Can you talk about opportunities, you know, years ago you talked about ramping up Indiana TANF and kind of maybe the progress that is going on there and any opportunities or open doors in other states or a larger scope of business in Indiana?

Ralph Gronefeld

Well again as I mentioned Indiana TANF is performing very well. It is ramping up. There was a slight delay kind of waiting for the outcome of the election because this is Governor Daniels baby so to speak. And so he wants to make sure that you don’t get to two for down the path you if you’re going to have to take a different path. But it is doing well. The key is as we get the same rolling boat in Indiana and Arizona is to first get those two where they need to be, totally ramped up, performing well. And then once we have got that in our resume. Then we can move forward and show states how it works and how it can be successful. And that has been our goal all along. We’re not in a position to do that right now. We want to make sure that before we were out there and make promises that they we not be able to maintain. That we have got the experience; we’ve got the systems; we have got the results. We’ll go out and say look this is what we did for these two states and we think it is an opportunity for other states to improve their outcomes for people out of work.

Greg Williams – Sidoti & Company

And when do think that would be a point you alluded to that getting to where we needed to be?

Ralph Gronefeld

We’re looking at Indiana; we’ll get there sooner than Arizona. We’re looking at the end of next year.

Greg Williams – Sidoti & Company

The next year. Thanks. And can you run me again in the core business MRDD space, the contract season is it usually July bidding cycle or they are sort of spread out across the months.

Ralph Gronefeld

Well, the budget season is most state budgets are July 1 fiscal years, ending June 30th. We’re got a few states that are August year end and a few that are October 31st year end, but most of them are that June 30th year end. When you talk about contracts, contracts are all over the board. Some contracts are individual specific. Some contracts are based on licensed home or licensed facility. So it is really all over the board as far as the contracts. And at any point in time the referral agency or the payer group or however is making those decisions with a state can make a determination that an individual needs to receive services somewhere else. The individual can make that determination under choice. And their family members can. And so the contracts really don’t mean a whole lot from that standpoint either for maintaining the business or losing the business or winning new business. And so it is all about choice. It is all about providing good quality services. And for the most part once folks are in our care they stay because we do a good job and with the current financial environment for states the only way to pick up business in that space is either take it from another provider or to do an acquisition and those are the kind of things that we continue to focus on in the DD space.

Greg Williams – Sidoti & Company

Okay thank you.

Operator

Our next question comes from the line of Richard Close of Jefferies. Please go ahead.

Richard Close – Jefferies

Hi David. I was wondering if you could give us your thoughts on organic growth in ‘09. I think you previously said you guys look for like 4% to 5% organic growth and based on the current economic environment should we be toning down that sort of outlook?

Ralph Gronefeld

Richard this is Ralph and yes we should. The short answer is yes. I mean, the 4% to 5% was based on the economic environment being where it was a year ago. We’re looking at not a major reduction. We’re looking at a 2 to 4 range on a go forward basis, which is why we continue to look at other opportunities to do internal growth such as Care Resources. Care Resources sets us up to win new contracts. International sets us up to win new contracts. We have proven through our employment training that we can do that very, very well and we’re going to take what we have learned an apply it to our (inaudible) business and international business. CFG, again the organic growth model is home care. And we still see that that will continue to grow. And that will grow in that 8% to 12% range probably to narrow it down closer to 10 on a going forward basis but it is still going to grow of course. But our core business the DD business is going to be very challenging to grow and that is still the bulk of our revenue. And so because of that the overall organic growth of the company is going to have to come down a little bit. You know, we’re not going to have a rate increases and we may see rate decreases that is going to impact the overall organic growth.

Richard Close – Jefferies

Okay, thank you. And then when we think about reimbursement and service cuts and you said in your comments that you know, right now looking into ‘09 you’re not really seeing anything at this point. When typically in the budget process as we approach that July 1 fiscal year, when do you see these cuts sort of begin to be discussed.

Ralph Gronefeld

Well depending on when sessions begin the conversation begins at that point. And we’re always involved with our provider associations with our lobbying groups in those discussions. And at that point in time we will start looking at it. In some cases it should have started now. It started December-January range, where those conversations will start occurring. Again, we will continue to grassroots effort with our payer sources, with legislatures and make sure people understand the need in that. But I guess that the good news what we’re right now is that in some cases historically we would have a lot more visibility on the negative than we do right now. And that gives us some comfort that maybe it is not going to be as bad as what the state budgets indicates that it could be what it is hard to say. We’ve had situations where over a weekend – Louisiana several years ago in the course of a weekend reduced our rates overnight, cut outs. So that could happen. There is always that risk. But again we’re positioned well. We’re being very proactive in that process and our payers understand that the folks that the support and their needs and then the quality care that’s really dependent on reimbursement.

Richard Close – Jefferies

Okay, and then I mean not a direct competitor of yours but one of the companies in the social services area, I guess, had some issues with higher utilization on some contracts and the State, I guess, is not necessarily agreeing with third party rates on that. That should have increased to I guess to offset the company’s cost. Do you have any contracts that you know are exposed to higher utilization and you could be short on a contract in terms of what you’re getting in terms of the revenue versus the cost. Are there any risk situations like that?

Ralph Gronefeld

Yes it is de minimis. I mean you’ve got different service delivery models all over the country Richard. Some are based on 15 minute interviews, and what you do during those 15 minutes as far as service units. You know in some cases, especially in our periodic business the public funded periodic business there may be situations where they want you to provide twelve hours of service a week let us say. And what could happen is that they could come out and tell, hi well we have got a budget issue so we’re not going to cut your rate but we’re going to reduce you down to eight years of service a week. Those things can happen. We have seen that happen. North Carolina has made some of those types of moments with our services but we just kind of move with it. They come back and say okay it is 24 hours we will provide 24 hours a week, then we work through and then they come back and say where the most we can have now is 12 hours a week. Then we will work through that and again when everything is said and done it is about the people that we support and for somebody who really needs 24 hours of service then we will fight through the assessment process to make sure they’re getting the 24 hours of service. So, we’ve got some of that but it is more based on units then it is based I guess third party costs or anything like that, because we’re the service provider. And so we’re in a different space I think than who you referring to.

Richard Close – Jefferies

So, we’re not going to a wake up one morning and have you, a significant earnings miss or something like that because you had – have increased utilization on a particular business or contract?

Ralph Gronefeld

No, not that I can foresee.

Richard Close – Jefferies

Okay, good. And that is positive. When we think about the remote monitoring rollout that you know started a couple of years ago. How many states are you licensed now with that and could we envision that growing in the number of states you’re able to roll out the monitoring?

Ralph Gronefeld

Right now we’re providing services in Indiana and Florida. We have opportunities to provide services in Kansas and Oklahoma. And we’re also looking at Texas. As far as opportunity absolutely, states are slow to react, government only tends to react when there is a crisis. If you look at the numbers that we’re seeing from a budget standpoint with states they’re definitely in a crisis mode. This is an opportunity for states to finalize provider services to more people for less cost. And we have really ramped up the marketing of ResCare this year, we ramped up the infrastructure of the sales of ResCare this year and we’re in a position right now where we have got excess capacity. We’re prepared to win what I would call the flood gates open. We’re prepared to provide those services. This to me is really a solution. And from our standpoint and no greater for states to take advantage of this service delivery model. And we’re in a great spot to make that happen. It is always slow going when you are asking bureaucrats and state agencies to change but again I think we’re in a great position to take advantage of it and also to deal with the workforce issues at the same time. So, we’re really excited about it. It has been slower than I would have ever thought understanding how it works and understanding the benefits of it and the benefits to the people that received the services, the benefits to the state. But again (inaudible) and the large institutions is basically operating at $800 a day or anything like that. So, we understand that but I think that we are in a good spot to really ramp this thing up going forward and it is also a model that we can use on private pay which is the path they are running down in Florida right now.

Richard Close – Jefferies

Okay. And so how do you picture in terms of serving more people with less money, how does exactly that go?

Ralph Gronefeld

Well the way that it works is that one direct support professional can monitor 32 sites versus today you need 32 direct support professionals to monitor those sites. That is how you reduce costs. And also reduce the resource issue, which is the precious resource of direct support professionals. So that is how it works and –

Richard Close – Jefferies

So, you essentially share that cost savings with the state and is that you are picturing it?

Ralph Gronefeld

Exactly right.

Richard Close – Jefferies

In terms of taking all that essentially margin yourself?

Ralph Gronefeld

Right, yes. Because you know it is a win-win. That is how we operate. We want to be partners with our customers, it is a win-win. And we saw that happen in Indiana. It has actually been a good model for the state of Indiana. Governor Daniels supported this model and still supports this model today. In fact, just recently in a press release talked about this model and how it is working and using technology to help deal with the Medicaid issues. So, yes we would go to the state and we can say, we can save you x number of millions of dollars by using this service delivery model and we would improve our margins. We would reduce the risk. We will provide services that help people because be more independent because they don’t have staff sitting in their home and it is a win-win-win across the board for everybody.

Richard Close – Jefferies

Okay. And then final question is obviously during the last recession your company was in a much different position and I think you said earlier that you feel pretty comfortable that you can maneuver – your positioned well to maneuver through the current environment. Is there anything that you know, I mean really other than the budgetary environment that you guys are thinking, you know, can creep up as the major problem. Anything keeping you up at night other than the reimbursement?

Ralph Gronefeld

Well, there is an end now with the new administration. And there is a lot of questions about the new administration’s commitment to keep up with disabilities and the work force. Historically, the democratic party has been more on social services but also historically the democratic party has been less active to privatization. So there is pro and a con there. So, if there is anything that is keeping me awake at night right now, it is more the unknown than the known, but as we move through and as the president elect Obama puts his cabinet in place and we see who’s going to be in charge of HHS and CMS and those types of things. Then we will have a better idea of what those things maybe. But other than that again I think we’re in a pretty good spot. And I think we have done a very, very, very good job of positioning ourselves to kind of deal with these things. If I had a wish it could be that our home care business was more as a percent of our revenue than what it is right now. That we hadn’t gotten there a little quicker. That our international business would be a little bit higher than what it is right now. That we have gotten there are a little quicker or that the current economic downturn had been a little slower getting here, but the timing didn’t work in our favor from my standpoint but we are still in the market. We are still positioned and we are still in a spot where we can advantage of it.

Richard Close – Jefferies

Okay. Thank you.

Operator

(Operator instructions) Our next question comes from the line of Kevin Ellich of RBC Capital Markets. Please go ahead.

Kevin Ellich – RBC Capital Markets

Hi. Just a couple of quick follow-ups and I don’t know if you mentioned this but wondering if you can give us any time frame as to how long it’ll take before the international acquisitions are fully integrated?

Ralph Gronefeld

Well we anticipate full integration to occur in the first part of next year, and then immediately after that start seeing growth in revenue to start leveraging the infrastructure that we put in place.

Kevin Ellich – RBC Capital Markets

Okay, and then you know, given the kind of global slowdown economically. Have you seen any change in the EU status in terms of funding for employment training?

Ralph Gronefeld

No, not really. There are some pockets of areas where the referrals of slowed down a little bit but for the most part the reason why we went international is not only to diversify geographically but also to diversify from the standpoint that regards to the economic downturn the international community tends to spend more dollars on social services in our space and the margins seem to be higher. So that decision still is a good decision and those facts still exist even if there is a downturn.

Kevin Ellich – RBC Capital Markets

Okay, that is helpful. And then just a stab in the dark, do you have any idea or any possible candidates who president elect Obama might place as Head of HSS.

Ralph Gronefeld

There is all kinds of rumors out there but now at this point in time I’m not sure who is looking towards.

Kevin Ellich – RBC Capital Markets

Okay, and then lastly. Have you noticed – have any other states actually drawn any of the workforce business back in-house besides Florida?

Ralph Gronefeld

Now and again that is very difficult for states to do. It is not an easy process. And it is actually again going goes against the intent of the WI [ph]. So, Florida is a unique situation. Florida is unique across the board as far as some of the budgetary issues, but it is – I think it is an anomaly.

Kevin Ellich – RBC Capital Markets

Okay and then last question. You guys stated 25 contracts were won that were rebid for $33 million did you guys how many your lost and what that value was?

Ralph Gronefeld

We lost on our rebids, we have lost 7, won 22. The 7 that we lost is of value of about $4 million.

Kevin Ellich – RBC Capital Markets

Excellent. Thanks guys.

Ralph Gronefeld

Thanks guys.

Operator

Our next question comes from the line of Jim Macdonald of First Analysis. Please go ahead.

Jim Macdonald – First Analysis

I think bigger your bill, more cautious than usual. Does any of that relate to being cautious on your bank line and can you talk about kind of your comfort level on taking up the debt?

Ralph Gronefeld

Well, yes, some of it has to do with just the whole credit environment. We understand that if we have to go back to the banks and say a deal came our way that would be excess to our capacity. We understand that if we are going back to the banks in the current environment it would be costly versus what we currently spend. And so we don’t want to be put in that position. So, we’re being a little bit more conservative and as far as just managing it, again looking for those deals that really hit that’s sweet spot for us and consequently basically buying our time till the credit markets come back. And then we can go back out and deal with that. Our line does come due in 2010 and so late 2009 we will probably start preparing to go out anyway. But in the meantime just want to make sure that we manage our business and we fund our growth through existing cash flow and the line that we got in place without taking any – for having any reason to go back out at this point in time, I guess, what I am trying to say.

Jim Macdonald – First Analysis

And just a quick follow-up on that. So, based on your current debt to date. How much could you take that up without triggering any changes.

David Miles

Jim this is David. We’re got about 80 borrowed against her 250 with LCs of about 50. And then with our working capital need, at least with $70 million to $80 million worth of dry powder in addition to the free cash flow that we generate 60 to 70. So (inaudible) sufficient capital to execute on the strategy that Ralph laid out.

Jim Macdonald – First Analysis

Okay, thanks very much.

David Miles

Okay.

Operator

And our next question comes from the line of Steve O'Neil of the company Hilliard Lyons. Please go ahead.

Steve O'Neil – Hilliard Lyons

Good morning.

Ralph Gronefeld

Good morning Steve.

Steve O'Neil – Hilliard Lyons

Ralph I just wanted to check a couple of numbers here. You talked about winning 25 bids for $33 million. And I didn’t quite catch that was that all in the third quarter or was that year-to-date?

Ralph Gronefeld

That is year-to-date.

Steve O'Neil – Hilliard Lyons

Okay, and then you also said you lost 7 won 22. Did I hear something wrong or how does that?

Ralph Gronefeld

On rebids we won 22 contracts, maintained 22 contracts and we lost 7 of those 3 bids.

Steve O'Neil – Hilliard Lyons

And then the other what the additional three bids do?

Ralph Gronefeld

No, we rebid on 29 in total. We lost – we won 22 of them, retained 22 of them and lost 7. Let me back up and clarify the numbers.

Steve O'Neil – Hilliard Lyons

We have reconciled with the 25 and the 29 that is all.

Steve O'Neil – Hilliard Lyons

Okay.

Steve O'Neil – Hilliard Lyons

I guess you reconciled –

David Miles

25 from new contracts and bids the 29 was rebids on existing contracts.

Steve O'Neil – Hilliard Lyons

Okay. Thanks for clearing that up and then currently the corporate expense is up 14%. Can you elaborate on that?

Ralph Gronefeld

Yes, Steve there is a couple of things, three things really driving it. The first is our continued focus on strengthening our infrastructure or systems in the IT area. And so we have got some increased cost there. Share based comp was up a little bit in the third quarter and then also just increased G&A relative to our growth of the 6.4%. So those are the three things driving it. If you back out the IT and the share based comp the net number would be a 4% to 4.5% increase, which would again indicate we are still leveraging our G&A.

Steve O'Neil – Hilliard Lyons

Then last thing. I didn’t quite hear what David said about you have drawn $80 million on your $250 million line of credit. And then you mentioned, I heard $50 million and I didn’t quite hear what he said.

David Miles

Sorry, $50 million in letters of credit that are drawn against the revolver and then ex the additional working capital that we need mid-month that will leave about the $80 million worth of dry powder.

Steve O'Neil – Hilliard Lyons

Great. Thanks very much.

David Miles

Okay Steve.

Operator

And Mr. Gronefeld there are no further questions on the audio bridge, I will turn the call back over to you?

Ralph Gronefeld

Okay thank you Wayne. We are confident about our company in today’s difficult financial environment. We will continue to mitigate our risk by controlling cost, providing high quality services and diversifying and growing our businesses through strategic acquisitions and organically. We have the experience and we provide essential services that continue to be highly valued during these trying times. Thank you for your continued interest in our company.

Operator

Ladies and gentlemen that does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your lines.

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