America Service Group Inc. Q4 2008 Earnings Call Transcript

America Service Group Inc. (ASGR)

Q4 2008 Earnings Call

March 4, 2009 11:00 am ET

Executives

Mike Taylor – Chief Financial Officer

Rich Hallworth – President and Chief Executive Officer

Larry Pomeroy – President, State Correction Systems

Analysts

Kevin Campbell – Avondale Partners

Michael Lamb – Wealth Monitors

Presentation

Operator

Ladies and gentleman, thank you for standing by. Welcome to the America Service Group fourth quarter and year end conference call. (Operator Instructions). I would now like to turn the conference over to Rich Hallworth President and Chief Executive Officer. Please go ahead sir.

Rich Hallworth

Thank you. Good morning and welcome to the Q4 earnings call. Beside investors and analysts there are a number of our employees and clients listening to this call. I’m sure a fair number of our competitors have also dialed in.

What all of you share in common is an interest how America Service Group and our operating companies PHS and CHS are faring in this severe recession. I am very pleased to say that this company has never been in better financial and operational condition.

I particularly like our strategic competitive position. Ours is not a glamorous business but we provide a vital public health service delivered 24/7 by a team of dedicated compassionate professionals. I’m inspired by their devotion to caring for this underserved population in very challenging physical environments.

Though our business may not be glamorous, I think our business model puts us in a position of envy in these unprecedented economic times. We are not a capital intensive business. We provide a constitutionally mandated service. Our contracts are all with government entities and we have no business dependent upon consumer spending. Our biggest risk factor is the timeliness of cash collections. That being said at December 31st we had only 31 days sales outstanding in receivables the lowest we have experienced in anyone’s memory.

Our balance sheet is very strong with no debt and cash on hand of $24.9 million at year end. This is a major improvement from last December when our net cash position was $1.5 million. With no debt we clearly distinguish ourselves from most of our major competitors.

During Q4 and all of 2008 we continued to invest in the technology systems and clinical and administrative protocols which will help our people improve the quality and consistency of care and also improve the management risk inherent in this business. I am proud of the progress made so far and the positive impact these investments are having in our operations.

Following an award announcement in December, in February 2009 we signed a contract to provide correctional healthcare services to the inmate population of the Michigan DOC. The initial terms of this contract run through March 2012 with four one-year extension opportunities. We are pleased to add Michigan to our impressive list of clients.

We have begun the transition phase and we are building towards providing inmate care services on April 1. By the terms of our agreement there is no revenue during this transition phase. And I’m pleased to say that we are – that our early progress in Michigan has gone great.

These unprecedented economic times have and will continue to present severe financial hardships to states, counties and municipalities. We are committed to working in partnership with our clients to find innovative ways to meet care requirements in the most fiscally responsible manner possible. Over $5 billion is now spent each year by government entities which self operate their correctional healthcare.

With very tough policy and financial decisions needing to be made we expect to see an increase in green field opportunities in the 12 to 18 months. Our proven track record of being able to save previously self operated systems over 25% in the first year and holding subsequent year's increases below their historic experience both while improving the quality of care, is a compelling story when governments are facing tough choices on basic government services of education, public safety, roads, bridges, etc.

The company currently has submitted several bids representing a total of about $35 million in new annualized revenues. Over the next 12 months we estimate that between $150 and $260 million of new business may come out to bid. The only scheduled RFP is for Tennessee DOC but we are hopeful that other DOCs, both self operated and currently served by competitors, may be competed such as Indiana and Delaware.

The transition of executive management of our company has been completed. I’m very pleased with the team I have in place and I particularly like the focus on new structure it places on our three major market segments, state prisons, community jails and the unique needs of the large metropolitan correction systems.

As we launch into this new era for America Service Group I believe we are on the path for long-term success. I very much like our starting position. In this economic environment with governments looking to save money, a major competitor reeling from the loss of 25% of their book of business in the last year, our new management team and our very strong balance sheet and cash flow position, we are uniquely positioned to be able to seize new business opportunities.

We are also the only correctional healthcare company with the scale in financial strength to continue to invest in the technology systems which will help us better manage the health of inmates in our care. I’d now like to ask Mike Taylor, our Executive Vice President and Chief Financial Officer, to speak more about financial matters.

Following Mike’s commentary Larry Pomeroy, who’s transitioning from Senior Vice President of Business Development to his new position as President of State Correction Systems, will also be available for questions. Mike.

Mike Taylor

Thank you, Rich. The company’s financial performance for 2008 was essentially in line with updated guidance provided in conjunction with fourth quarter results and well ahead of our initial expectations for the year provided last March.

Some highlights. Gross margin on continuing contracts was 8.3% for 2008 versus 6.1% in 2007. Adjusted EBITDA was $16 million in 2008 compared with our initial expectations for the year of $14 million. Net income for diluted common share in 2008 increased 40% from 2007 levels.

The company generated $28.8 million of cash flow from operations in 2008, further strengthening our already strong balance sheet. As Rich mentioned as of the end of 2008 we had $24.9 million of cash and no debt outstanding. Not a bad place to be in today’s current economic environment.

Let’s review some of the financial details related to the fourth quarter and full year 2008 results. Healthcare revenues were $120.8 million in the fourth quarter, an increase of 4.9% over the prior year quarter. For the year ended December 31, 2008 healthcare revenues were $497.7 million, an increase of 7.3% over the prior year.

As a reminder healthcare revenues only include those revenues from healthcare service contracts that continue to operate subsequent to the end of 2008 due to the accounting requirements of FAS 144. FAS 144 requires us to present expired healthcare service contracts as discontinued operations and collapse the revenues and direct expenses of those contracts into the line item on our income statement that is titled Income or Loss from Discontinued Operations Net of Taxes.

When you include revenues generated by expired healthcare service contracts total revenues were $121.2 million in the fourth quarter, a decrease of 5.2% from the prior year quarter. Total revenues for the year ended December 31, 2008 were $505.1 million, a decrease of 9.2% from the prior year.

The decrease in total revenues in the fourth quarter and year ended December 31, 2008 is primarily due to the expiration of the Alabama DOC contract in the fourth quarter of 2007. Healthcare expenses from continuing contracts were $110.9 million in the fourth quarter and $456.4 million for the year ended December 31, 2008. In the prior year healthcare expenses were $110.5 million in the fourth quarter and $435.9 million for the year.

An adverse jury verdict rendered against the company of $3.6 million significantly impacted healthcare expenses in the fourth quarter. Still pending is the plaintiff's request for an additional $2.4 million of costs and legal fees. The company believes that there were several reversible errors made at the trial court level and has filed its appeal seeking a reversal of the verdict and a remand for a new trial.

A relatively small amount of share-based compensation expense is included in healthcare expenses in both years' results. Total healthcare expenses, which includes healthcare expenses from expired healthcare service contracts and excludes share-based compensation expense, were $111.6 million in the fourth quarter as compared with $121.2 million in the prior year quarter. For the year ended December 31, 2008 total healthcare expenses were $464 million as compared with $518.8 million in the prior year.

Gross margin from continuing contracts was $9.9 million in the fourth quarter. This is 8.2% of healthcare revenues. This compares with 4.1% in the prior year quarter. Gross margin for the year ended December 31, 2008 was 8.3% of healthcare revenues as compared with 6.1% in the prior year period.

Total gross margin which includes revenues and expenses from expired healthcare service contracts and excludes share-based compensation expense was $9.6 million or 7.9% of total revenues in the fourth quarter. This compares with 5.2% in the prior year quarter. For the year ended December 31, 2008 total gross margin was 8.1% of total revenues as compared with 6.8% in the prior year.

Selling general and administrative expenses were $6.2 million in the fourth quarter as compared with $5.9 million in the prior year quarter. Included in selling general and administrative expenses is $455,000 and $539,000 of share-based compensation expense in the fourth quarters of 2008 and 2007 respectively.

For the year ended December 31, 2008 selling, general and administrative expenses were $27 million as compared with $26.3 million in the prior year. Included in selling, general and administrative expenses is share-based compensation expense of $2 million in the year ended December 31, 2008 and $2.9 million in the prior year.

Also included in selling, general and administrative expenses in the year ended December 31, 2008 is $1.6 million of accrued bonus expense related to the company's 2008 incentive compensation plan. There was no similar accrued bonus expense in the prior year related to the company's 2007 incentive compensation plan.

Excluding share-based compensation expense, selling, general and administrative expenses were 4.8% of total revenues for the fourth quarter of 2008 as compared with 4.2% in the prior year quarter. For the year ended December 31, 2008 selling, general and administrative expenses, excluding share-based compensation expense, were 5% of total revenues as compared with 4.2% in the prior year period.

The company incurred $2.3 million of corporate restructuring expenses in the year ended December 31, 2008, all of which were recorded during the third quarter of the year. During the fourth quarter and year ended December 31, 2007 the company incurred $107,000 and $440, 000 respectively of corporate restructuring expenses.

Adjusted EBITDA was $3.8 million in the fourth quarter of 2008. This compares with $1.2 million in the prior year quarter. For the year ended December 31, 2008 adjusted EBITDA was $16 million as compared with $14.2 million in the prior year period. Net interest expense was $97,000 in the fourth quarter. This is compared to $458,000 in the prior year quarter. For the year ended December 31, 2008 net interest expense was $722,000 as compared with $1.6 million in the prior year.

The income tax provision related to continuing operations for the fourth quarter of 2008 was $1.2 million. This compares with an income tax benefit of $1 million in the prior year quarter. For the year ended December 31, 2008 the income tax provision related to continuing operations was $3.2 million as compared with an income tax benefit of $1.5 million in the prior year.

Income from continuing operations after taxes was $1.3 million for the fourth quarter as compared with a loss of $1.8 million in the prior year quarter. For the year ended December 31, 2008 income for continuing operations after taxes was $4 million as compared with a loss from continuing operations of $2.6 million in the prior year.

The company had losses from discontinued operations net of taxes of $177,000 and $206,000 in the fourth quarter and year ended December 31, 2008, respectively. This compares with significant amounts of income from discontinued operations net of taxes of $1.1 million and $5.4 million in the prior year fourth quarter and year ended December 31, 2007, respectively.

Net income for the fourth quarter 2008 was $1.2 million or $0.13 per common share basic and diluted. This compares with a net loss of $685,000 or $0.07 per common share basic and diluted in the prior year quarter. For the year ended December 31, 2008 net income was $3.8 million or $0.42 per common share basic and diluted as compared with $2.8 million or $0.30 per common share basic and diluted in the prior year.

Cash balances increased to $24.9 million at December 31, 2008 from $22.5 million at the end of the third quarter and $9 million at the end of 2007. The company reduced its outstanding debt to zero at December 31, 2008 from $7.5 million at the end of the third quarter. Days sales outstanding and accounts receivable were 31 days at December 31, 2008 down from 37 days at September 30, 2008 and 45 days at December 31, 2007.

For the year ended December 31, 2008 net cash provided by operating activities was $28.8 million as compared with $9.5 million in the prior year. During the fourth quarter the company repurchased and retired 100,000 shares of its common stock for approximately $853,000. For the year ended December 31, 2008 the company repurchased and retired 246,900 shares of its common stock for approximately $2.4 million. The company provided its initial guidance for 2009 financial results in yesterday's press release. Some highlights.

On a GAAP basis the company expects net income to more than double to approximately $7.8 million or $0.91 per diluted common share in 2009 from $3.8 million or $0.42 per diluted common share in 2008. We expect total revenues for 2009 to be between $600 and $610 million, primarily due to the company's new contract with the Michigan Department of Corrections which begins fully on April 1st.

We are being a bit cautious initially on the gross margin expectations for 2009 at 7.4% to 7.5% of total revenues. This is due to start up costs in Michigan, the expectation that financial performance will slowly improve over the period of the Michigan contract, and the expectation that the company's full risk contracts, which performed very well in 2008, will produce more normalized gross margins in 2009.

Selling, general and administrative expenses are expected to grow somewhat in 2009 primarily due to greater investment in clinical and information technology infrastructure to support the company's clinical processes and software applications.

Amortization expenses are expected to drop significantly in 2009 due to the company's 1999 EMSA acquisition contract intangible assets becoming fully amortized. Consistent with past practice the company's guidance for full year 2009 results does not reflect the impact of any potential contracts with new customers, other than the Michigan DOC contract, which commences fully April 1st. Contracts currently in operation are included in the guidance through the end of the year unless the company has been notified otherwise by our clients. Operator at this time we would welcome questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions). Your first question comes from Kevin Campbell – Avondale Partners.

Kevin Campbell – Avondale Partners

Good morning, thanks for taking my question. I was hoping you guys could talk a little bit about your guidance and what you're assuming there as it relates to pricing and your typical CPI rate increases. Are you assuming you get the full rate increase for all contracts effective July 1st? Are you hair cutting that to some extent? Obviously given the budget environment would love to hear your thoughts on that.

Mike Taylor

Kevin we do anticipate some level of increase in most all of our contracts as they come up for the next contract year. I would say that those expectations are tempered a bit obviously by the overall economic environment. So our estimates of same contract growth if you will would come out less than they have historically. We are anticipating somewhere between 3% and 4% pricing changes on contracts at the moment.

Kevin Campbell – Avondale Partners

So you're anticipating 3% to 4% and historically maybe it's been a little bit higher or has it historically it been 3% to 4% and you're expecting it to be a little bit below that?

Mike Taylor

No, it has historically been higher in most years. We've seen years where it's been double digits because of the healthcare inflation or change in scope of services. But certainly, this year we don't anticipate nearly as much of that. We've seen kind of mid to high single digits in most of the last five to seven years. So we think three to four is a more conservative view based on the reality of what's happening around us.

Kevin Campbell – Avondale Partners

Have you had any negotiations with any state or county customers right now about adjusting your contracts to help them reduce their costs? And if so, what is the benefit that they are willing to offer you to help them lower their costs?

Mike Taylor

We've seen things that are very similar to what happens every year, honestly, when we sit down with our clients. They're always looking for more cost-effective ways to provide care in this setting. And oftentimes, historically, when we've had budgetary issues raise their heads with our clients, it has given us an opportunity to sit down with the client and really redo the staffing mix, if you will, to provide care in this setting.

Oftentimes when we respond to a bid, it will be a mandated staffing matrix that may be heavier on physicians or RNs where the work may be done as effectively, or efficiently, and more cost-effectively with physician extenders, LPNs, etc. So I expect some of that will continue and probably increase in terms of likelihood over the next 12 to 24 months.

Kevin Campbell – Avondale Partners

Have you had any customers with full-risk contracts that maybe are looking to shift to the shared-risk and hopefully lower their costs that way?

Rich Hallworth

None to date.

Kevin Campbell – Avondale Partners

Another question as it relates to your facilities themselves and the number of inmates in them, are you seeing states overcrowd the state prison systems and also, sort of flowing down into the county jails? And if so, is that a positive for you as you have more inmates come in, potentially, to the system? Or is that a negative because you might have more costs, or does it really depend each individual contract?

Larry Pomeroy

Kevin, this is Larry. Certainly each contract does vary. In general, we're still seeing high capacity occupancy in – you asked specifically about state prison systems. There are many of them that have farmed out excess inmate populations either to county jails or other states even.

Some of that is starting to shift back in into the state systems. There clearly is a an overall concern about the population and costs that are being driven by the heavy ramp up in the state prison systems and incarceration in general in the country. I think we may see some degree of moderation over time in the number of inmates doing hard time in the prison systems. I don't think it's going to be dramatic in terms of a drop, but again each state is going to vary.

We've seen some that have dropped population. Michigan is a good example right now. They've dropped a couple thousand from their high of a year or two ago. We don't see the bottom falling out, per se, and you've also got new admissions coming in, an aging population and, again, a constitutionally mandated set of services here.

So I think you're going to see some shifts and changes in the nation's correctional policies and the development of other alternatives to incarceration and potentially areas where we could expand our services into as that happens.

Kevin Campbell – Avondale Partners

So if you were managing a county jail in a state that was overcrowding that jail with their own inmates, would you benefit from that, or would it be an additional cost for you? I am trying to understand whether or not that would be a positive or a negative?

Larry Pomeroy

If you're saying we're holding that jail's healthcare contract? That would generally benefit us. We're not required to treat inmates without compensation. So it may be a different – that's primarily an issue and a contractual arrangement between that jail and the state. So that would be added typically to our population of covered lives, or if it's carved out entirely we would not have the financial responsibility. So it's not a negative I guess.

Kevin Campbell – Avondale Partners

And then just a quick question on the start-up costs as it relates to Michigan, can you give us some idea as to how much we should expect and when they will occur? Will they be primarily a first quarter impact? Will it be first and second, just trying to get a better sense for modeling that?

Rich Hallworth

The start-up costs that we expect to incur in Michigan will hover right around a million dollars and they'll primarily be in the first quarter, Kevin.

Kevin Campbell – Avondale Partners

Will that come mainly in the healthcare expense line or will that be more SG&A or spread through both?

Rich Hallworth

Mainly in the healthcare expense line.

Kevin Campbell – Avondale Partners

And then last question before I jump back into the queue, your tax rate, can you comment on why that's just so high in general? It's around 46% I think for the full year of '08. In your guidance it assumes it comes down I guess to 42% in 2009. So maybe why was it higher in 2008 and why do you think it will come down in 2009?

Mike Taylor

Yes, the effective tax rate is primarily a function of the amount of undeductible expenses as a percent of the total pre-tax income. So actually what happens is our pre-tax income goes up, our effective tax rate is going to drop because those non-deductible type of expenses make a smaller and smaller piece of the total equation.

And that's why it's a little higher than we would like to see currently, and that's why it should be mitigated when you see the nice change in pre-tax income that's expected in '09. It should drop it down to a more normalized rate in between 42% and 43%.

Kevin Campbell – Avondale Partners

So it might have been lower in prior years because you had that Alabama contract. That goes away so your pre-tax income comes down, the rate goes up. And now you'll see the reverse of that adding Michigan to the mix?

Mike Taylor

Exactly.

Operator

(Operator instructions) Your next question comes from Michael Lamb – Wealth Monitors.

Michael Lamb – Wealth Monitors

First question, Mike Taylor, what drove the DSO benefits so strongly?

Mike Taylor

Well, Mike, a lot of things happened that were positive. One, we got a few collections right at the end of the year, the last couple of days of the year that normally we would have expected in the first couple days of '09 so some of it was timing.

You've been around the company for a lot of years and we've never seen a 31 DSO at any point in time. So I'm very excited and encouraged by that. I do think that timing of collections, the last couple of days of the quarter versus the first couple of the next quarter will make that number bounce around little bit.

But overall we've seen a really good trend for a couple of years now of being able to manage this number down. So I think there's no magic bullet; it's just the blocking and tackling, making sure we're billing timely, making sure we're in communication with our clients about those bills.

And then on the aggregate cap risk sharing type of bills providing good detailed information to the clients. And we're working very hand-in-hand with them as they review those bills and try to continue to get paid on a timely basis.

Michael Lamb – Wealth Monitors

The cash level is almost $25 million at 12/31 and given your model will continue to substantially grow throughout '09. Can you give us some indication of the thought process that the board has reviewed in regards to use of that cash, and what levels you think the company needs to be, let's say, at its peak competitive position?

Mike Taylor

And certainly those views change over time as you can imagine. They're fairly fluid, but our board has historically, and will continue to consider the various forms of utilizing our capital in the best long-term interest of shareholders.

And we've always looked at that and said that all right, cash balances are this. That means excess cash. How do we best use any excess cash? Is that a share repurchase program which is what we're currently involved in.

Are there other better uses whether that's acquisition opportunities, reinvestment of capital back in to the business, items such as Catalyst that's been a big initiative for the company. I don't know that there's a magic cash level.

We are thrilled to be in a position as a company to where we're not dependent upon the capital markets right now. And I like that situation, and I know there will be a push to put that cash to work. And we intend to do so, but we're going to do it in a very thoughtful process with our board over time.

Michael Lamb – Wealth Monitors

Larry, you had mentioned, or someone had mentioned earlier, about greenfield opportunities. Can you start with Tennessee and hit on a few, Tennessee, Indiana and Delaware and particularly and is there any window opening up in California under their recent mandates, I guess I should call them.

Larry Pomeroy

Yes, you've hit on a number of things. Let me hold a minute on the greenfield and talk about the Tennessee, Indiana, Delaware, etc., the current competitor-held contracts.

Tennessee will expire at the end of this year and they're in the process of working on and looking structures for their RFP, and we're engaged with them in that process. We expect the Indiana DOC to issue an RFP. The current contract there expires at the end of August and we've been in discussions and meeting with them on that as they review their alternatives.

Delaware, I think everybody saw, had issued a press release about a renewal of their existing contract with their incumbent provider. It was kind of interesting that the commissioner, in that release, expressed his displeasure with that process. I think it was a purely budget driven issues that was, frankly, with the prior administration before the current administration came in. There is an opportunity for them, basically at any time, to issue an RFP earlier than the June 10 expiration of that extension, and we're hopeful that's something that they're going to seriously consider.

Idaho is another one that's kind of gone back and forth. If you recall, they issued RFPs last year, cancelled the RFPs due to cost issues, and they're in the process right now of determining whether they will go forward with an RFP or renew their existing provider. That current contract expires June 30 of this year. So there are a number of opportunities for competitor bids that we're actively pursuing.

On the Greenfield opportunities that are not currently contracted or privatized, given that some of the ears that are on the call here, I'd rather not go into details about that, but maybe as an anecdote, Rich and I attended the National Governor's Association meeting in Washington a couple weeks ago.

And I think suffice it to say that there are a number of states that have been, I guess, lukewarm or not motivated to pursue the value proposition that we bring to the table, that are now very interested and wanting to hear about that, understand what we're doing in other states, etc., and that's opening up a number of opportunities to hopefully accelerate the sell cycle that, as you know, can be extensive here.

Michael Lamb – Wealth Monitors

How did they accelerate that, Larry? Are they apt to do sole source, or on the first time –

Larry Pomeroy

No, I don't mean –

Michael Lamb – Wealth Monitors

Or are they going to have to do an RFP?

Larry Pomeroy

No, I don't mean accelerate as far as sole source, certainly on a state basis, meaning that they will move, perhaps, more quickly or expeditiously to do something in the area of contracting out services. I certainly don't expect to see a number of states within the next 12 months issue statewide comprehensive full service RFPs, although some of that is possible.

I think we'll start to see them initiate contracting opportunities in certain areas, whether it's managing offsite care, whether it's some staffing services, whether it's pharmacy, etc. So accelerate what can be, as you know, a multi-year sell cycle to develop any kind of an RFP opportunity with the state systems.

But we're seeing some of that same dynamic at the city and county jail level, as well, more in the larger jurisdictions where the budget and/or the states where the budget situation is more critical, i.e., California. Don't know what to tell you about California. At the state level, clearly still huge opportunities.

We've looked at and actually participated in one bid process. It was a bit out of the scope of our usual core wheelhouse of services, but we continue to pursue that and hope there'll be an opportunity to at least get a pilot program or toehold into the California market there at the state level.

Michael Lamb – Wealth Monitors

Thank you, Larry. Last question and then I'll jump back into queue. Rich, given the current economic environment that you mentioned earlier and the balance sheet and expertise and history of the company, is there anything in the current environment that you find detrimental to the opportunities to continue to grow?

Rich Hallworth

The drags on the potential for growth are really the states' and counties' reticence or reluctance to take on the union issues that are usually part of the conversion, or just inertia. They've got so many issues they're trying to deal with right now. This one has to bubble to the top and trying to get that on their radar screen is more of a challenge than you think it would be, intuitively, since, to us it just seems like low-hanging fruit. But trying to get the attention is a frustrating process that we are trying to push. But that's really the only detriments that I see.

Michael Lamb – Wealth Monitors

You mentioned a competitor that's lost 25% of its revenue base over the last year or so. Have you found also, in that competitive environment, that your Catalyst system has gained traction?

Rich Hallworth

Yes, our system has been well received by the now-two dozen or so sites that it's live, and we continue to get more demand from our clients than we have the capacity to fulfill with our current staffing at this point. And we are actively working towards the deployment of Catalyst in 2009 in additional sites, principally and very focused in getting it live in Pennsylvania DOC to their four busiest intake facilities, and so we are working very aggressively towards that in 2009.

We are also building a functionality that our people want in the field. As they've gotten a taste for what Catalyst can do for them they get hungry for more functionality. And we're building that functionality during 2009 very aggressively, so we're really pleased with the receptivity we're getting on the product. We really think it helps us manage our risks and manage the day-to-day flow of patients better, and we think it's a unique differentiator. It's something that is, for those who aren't familiar with correctional healthcare, an electronic health record in a commercial setting does not work in a correctional environment, and we've seen that time and time again.

And so we are very pleased that we chose this path a couple of years ago, now a few years ago. We think it's the right path. We continue to invest in it very heavily and expect to continue to invest in this because we do think it's the right thing for us and for our clients.

Operator

We now have a follow-up question from Kevin Campbell – Avondale Partners.

Kevin Campbell – Avondale Partners

Thanks. I just wanted to ask a couple of questions related to cash flows again. The DSOs I guess came down to 31 days. Is there a rate or a day number that we should probably think is a more normalized figure? And really looking at your cash flow from ops in general you know $29 million last year, what do you think is a more normal figure going forward?

Mike Taylor

Two part question there, Kevin, let me try to hit both for you. Obviously, I would be thrilled if we kept DSOs at the 31 day level that we had at year end. They have ranged, just to put that in historic perspective, they have ranged between 31 and 63, I think, in the seven plus years I've been around the company.

What I'd love to see is for it to stay in a range of 30 to 40 days. We used to use 45 as our target. I think we've been able to beat that more consistently than I had initially anticipated and so absent any significant changes to contract structures, I think something in the 30 to 40 day range is a good place to kind of peg whether we're happy or not.

In terms of cash flow from operations, I do think, on the current size of the company the $29 million is a unique number. I don't think that's replicatable every year. You have to start to look at the underlying earnings of the company. We're essentially guiding to about $18 million of EBITDA if you look at the '09 guidance. And then you're going to have a little bit higher load of cash taxes as NOLs roll off the company in '09, and then we've got some CapEx spend. So I think something in the teens is a good number if the balance sheet is consistent and it doesn't move one way or the other.

Kevin Campbell – Avondale Partners

Okay. And the CapEx, I know it's been a little bit higher, just as a percentage of revenue here in the fourth quarter up to a percent versus 0.5 in some of the prior periods. Should we expect that to go back to the half a percent level, should it stay at that 1%? Just some expectations here for 2009 might be helpful.

Mike Taylor

I think full year '09 at somewhere in between those two ranges you mentioned. I think we would anticipate, in raw dollars, that the CapEx grows a bit in '09. That's primarily driven by this continual investment into the Catalyst application and an additional development that related to Catalyst. So I would expect the CapEx dollars to go up a little bit. Obviously, revenues are going up significantly because of Michigan. So I think the expectation is somewhere in the three quarters of a percent range for CapEx of revenues.

Kevin Campbell – Avondale Partners

Okay. And then lastly, looking at the guidance, if there's going to be upside or downside to that number, maybe it's sort of a two part question. Where would you see that coming on the upside? What might drive that? And on the downside, what are the risks to the number?

Mike Taylor

I think the main upside would be the full risk contracts having a similar year in '09 to what they had in '08. We have assumed some normalization of that in the guidance that we gave for '09. So they had a really good '08. If that trend continues then I would anticipate that would be a positive impact on the gross margin line.

Obviously Michigan is a huge piece of the revenue growth and it's a new contract for us. It's got the startup costs that we talked about in the first quarter. We'll be getting our arms around that through the remainder of '09 once it's up and fully functional. And so we're being a bit cautious as to expectations in the early part of '09 and expect Michigan to get better the longer we're there. And we even put in place our clinical protocols and processes.

So I would point probably to those two in terms of the '09 financial performance as the biggest potential positive or negative implications on results. Lastly, we've seen better trends on the adverse development from professional liability claims in '08 versus prior years, except for this one time hit that we took in the fourth quarter from this jury verdict.

That, obviously, will continue to be an important part, but if the trends continue to play out, recognizing that this jury verdict that we just had related to care back over five years ago, then I think we'll continue to see good trends there. And that could give us some level of upside opportunity.

Kevin Campbell – Avondale Partners

And then the downside might just be if Michigan doesn't perform as quickly, or you might have more startup costs than you would expect?

Mike Taylor

That's correct.

Operator

Gentlemen, there are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks.

Mike Taylor

This call may contain forward looking statements made pursuant to the Safe Harbor Provision of the Private Securities Litigation Reform Act of 1995. As such, they involve risk and uncertainty that actually results may differ materially from those projected in the forward-looking statements.

A discussion of the important factors and assumptions regarding the statements and risks involved is contained in the company's annual report on Form 10-K and other filings with the Securities and Exchange Commission. These forward-looking statements are made as of the date of this call. The company assumes no obligations to update or revise them, or provide reasons why actual results may differ.

We have posted schedules on our company website at www.asgr.com, which reconcile our results as reported under generally accepted accounting principles to certain non-GAAP measures which may be referred to by our senior executives in our discussions today, and from time to time in discussing our financial performance. These schedules can be found on the website in financial press releases and investor presentations.

Thank you for joining us today.

Rich Hallworth

Thank you, all.

Operator

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

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Comments

[Pax Americana:]

This buisness model is primed for sucess, given a cash constrained
Federal Budget, and an Initial 25% saving for the DOC , in outsourcing
thier constitutionally mandated healthcare providers.

Jun 29 01:46 PM