America Service Group Inc. Q3 2009 Earnings Call Transcript

America Service Group Inc. (ASGR)

Q3 2009 Earnings Call Transcript

October 29, 2009 11:00 am ET

Executives

Richard Hallworth – President and CEO

Mike Taylor – EVP and CFO

Jon Walker – SVP and Chief Development Officer

Analysts

Mike Lamb – Wealth Monitors, Inc.

Wes Huffman – Avondale Partners

Alex Washburn – Columbia Pacific

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the America Service Group third quarter earnings conference call.

During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator instructions). As a reminder, this conference is being recorded Thursday, October 29, 2009.

I would now like to turn the conference over to Richard Hallworth, President and Chief Executive Officer. Please go ahead, sir.

Richard Hallworth

Good morning. Welcome to our Q3 2009 earnings call. A copy of our press release addressing our third quarter results can be found on our website www.asgr.com.

Before asking Mike Taylor to provide detailed commentary on our financial performance for the quarter, I have several comments I would like to make to our investors and other interested parties listening in to today's call.

I know there are a couple of topics on which we need to do (inaudible) there in today's call. Before I get to those matters, I would like to point out that excluding Michigan, our other contracts produced very good results again in the third quarter, exceeding our expectations for the seventh straight quarter. I am very pleased with the consistency in continued operations in those contracts.

We were however disappointed this quarter to learn that our financial performance in the Michigan DOC for the first three months of this new contract was not as we had previously estimated when we reported last quarter.

As you read in our press release, we recognized an additional $2.5 million of expenses in the third quarter, over and above our estimates for off-site claims incurred in the April through June start-up quarter. There are several significant unanticipated factors contributing to this result.

To help you understand why we were surprised by this large increase in costs related to the prior quarter, I would like to explain an important nuance of our business. During the course of the year, many of the inmates in our care require services beyond the scope that can be provided by our on-site providers. Whether or not we are financially responsible for the cost of the care provided off-site, we manage the inmates' care in cooperation with the off-site provider. The mechanism which triggers us to manage this care is the logging in of those inmates being transported off-site. These logs set in motion a detailed review of the inmates' care plan. We manage to care for thousands of days of inpatient hospitalization during the course of any given year.

In Michigan, unlike virtually all of our other contracts, the individuals responsible for logging inmates being transported for off-site emergency or inpatient care are not our employees, but instead, employed by the Michigan DOC. Knowing in a timely and accurate manner which inmates are receiving off-site services is, as just mentioned, an important factor enabling us to both report and manage inmates' off-site care and estimate the claims which we and Michigan DOC will be responsible for upon later billing by the provider.

During the initial operations, we were working cooperatively with the Michigan DOC to train their employees to provide the information we need. Reporting during those initial months has now been proven to be less accurate than we had originally anticipated. Compounding this effect was the fact that we inherited from the prior healthcare vendor an unanticipated substantial volume of previously approved or scheduled patient care services, which impacted the first few months of contract performance and costs. Further complicating the financial implications is the Michigan contract model, in which we partner with Etnar [ph], which holds the majority of the off-site majority contract and pay those providers claims on our behalf.

In the start-up months of this contract, claims from certain providers had not been received by Etnar, and due to the logging issue previously noted, we were unaware that several large claims have yet to be billed. In August, we were surprised by a large number of very late claims being submitted to Etnar for dates of service in our calendar second quarter.

Based on these results, we revised our estimates, increasing our claims expense for this contract for the April to June quarter by $2.5 million. This would revise Q2 Michigan performance to a lot. With that new off-site estimate, Q3 would have been at approximate breakeven. As such, we have tempered our near-term financial expectations for the Michigan DOC contract for Q4 to expect continued improvement and a profitable contribution to earnings, albeit not quite as high in Q4 as we had previously hoped.

An obvious question is how confident we are in our Q3 and Q4 Michigan DOC estimates, since Q2 proved to be under-reserved. While we cannot give absolute assurance, we have seen marked improvement in the trend of both the numbers of emergency room transports and inpatient days since the first few months of this contract. These services comprise the majority of off-site claims for us.

Training the Michigan employees responsible for logging the off-site trips is a key control for us. You should note that our Michigan contract is a shared-risk contract, so the State absorbs significant costs when inmates require off-site care. Both we and Michigan DOC are financially motivated to assure that the Michigan employees are logging in off-site trips for inmates.

It is important to note that our relationship in Michigan remains strong. We have a good management team in place and we are working cooperatively and effectively with a very dedicated Michigan DOC management team. Much progress has been made toward the goals we set up when we won this contract. We are confident that the financial under-performance can be significantly improved and this represents only a near-term financial disappointment for us.

Again, I want to emphasize that the Michigan issue overshadows what otherwise was a very strong quarter for our client contracts, the remainder of which exceeded our expectations.

I would next like to discuss the shareholder litigation matter. The company has been actively pursuing resolution of this litigation filed against the company and certain of its former and current officers in early 2006. Negotiations are being pursued through a private mediator. The mediation process is confidential. It remains to be seen whether this matter can be successfully resolved in the near term. The company does not believe that the suit can likely be resolved within the amount of the companies D&O liability insurance that the company expects to recover, at least in the near-term, and that some contribution from the company will be necessary. If it cannot be resolved at a level acceptable to the company, we are fully prepared to defend this matter through the court system to its ultimate resolution.

Although the company believes it has meritorious defenses to the claims and allegations in the suit, there can be no assurance that the ultimate resolution in the suit would not have a material adverse impact on our financial results, financial condition, or liquidity. As this is an ongoing legal matter, the company does not intend to comment further on this as part of this call.

I now want to switch gears. An issue which I always get asked these days relates to the impact the H1N1 flu will have on us. The flu is widespread and many ask what impact it will have on our financial performance for the rest of the year.

Seasonal flu has always been a significant focus for us, due to the very nature of our business of prisoners being congregated in tight living conditions. The H1N1 flu is no different in that regard. We work cooperatively with our clients and the Department of Health to vaccinate inmates and when influenza strikes, to treat the inmates. We do not expect the vaccination of inmates to have a significant adverse financial effect on the company. Should an outbreak occur, as it already has in many of our sites, we have established protocols in place to quarantine and treat the inmates. We do not anticipate the financial impact of treating inmates to adversely impact our guidance.

I would next like to point out our cash balance at September 30. We ended the quarter with $35.6 million of cash on hand and no debt. That is an increase of over $4 million from our cash balance at the end of Q2. Our days sales outstanding slipped slightly by two days to a still very good position of 29 days at the end of Q3. The third quarter marks the start of most of our governmental client's fiscal years. There was heightened risk of delayed collection of accounts receivable this quarter, pending passage of several current year budgets. While collections from certain clients were delayed, we were pleased with our collection efforts.

On to the business development front. We have several items to note on this call. First, for our existing clients, I would like to inform you of two noteworthy developments since last quarter's call.

Our contracts with the Vermont DOC expires at the end of January 2010. We have been proud to serve this client since 2005. However, we made a business decision not to re-bid this contract during the recent RFP bid process. While the company will not elaborate on the business risk factors which led us to this conclusion, I want to note that the reasons cited in several Vermont news outlets are pure conjecture and patently wrong. I want to thank the Vermont DOC for allowing us to serve them for the past many years. I especially want to thank our dedicated Vermont employees who have and continue to provide dedicated service on our behalf.

Our Wyoming contract was set to expire in June 2010. The Governor of Wyoming, citing budget concerns, required the re-bidding of this and most contracts. I am very pleased to say that we were rewarded another two-year contract as a result of the competitive bid process. Wyoming continues to be a valued client of the company. We are proud of the partnership we have developed with the Wyoming DOC to improve correctional healthcare in that state and look forward to continuing improvements over the upcoming contract term.

Regarding new business opportunities, we currently have pending or in process approximately $52 million of annual revenue potential. I would like to note that today, we notified the Tennessee DOC that we unfortunately would not be bidding on our home state contract. The terms of that RFP, which require the bidder to take full risk for three years with no out and setting an unachievable, not to exceed bid amount, coupled with onerous potential penalties led us to not bid.

The landscape for new DOC business opportunities continues to improve. Over the next 12 months, we anticipate over $500 million in additional annual revenue potential in new RFPs. Delaware, Maryland, and Idaho, all currently served by a competitor, are expected to be out to bid in this quarter, if timetables are adhered to.

In addition, we now expect significant Greenfield bid opportunities in the next 12 months in both Arizona and North Carolina. We also anticipate that the Georgia DOC, which is currently served by the Medical College of Georgia, will be releasing a RFP in this timeframe. We are hopeful that at least two other Greenfield DOC opportunities, Louisiana and Nevada will also come out to bid, although we have not included them in our pipeline, since their timelines have not been announced.

I would now like to ask Mike Taylor, our Executive Vice President and Chief Financial Officer, to speak in more detail about financial matters. Following Mike's remarks, Jon Walker, our Senior Vice President of Business Development, will also be available for questions. Mike?

Mike Taylor

Thank you, Rich; good morning, everyone. Even though our net income more than doubled from the prior year third quarter, we are reporting somewhat disappointing financial results for the first time in quite a while. This is driven primarily by the financial performance of our Michigan DOC contracts. However, we should certainly note that other than for Michigan, our financial performance was outstanding. The remainder of the current contract portfolio operated at or above expectations, and we were not hit with any significant adverse development related to professional liability expense, which has been an issue in recent quarters.

Also, even though the timing of cash collections can be volatile in this business generally, and in this economic environment specifically, the company was once again able to continue to build its cash on hand as of the end of the third quarter.

Let us review some of the financial details related to our third quarter and year-to-date results.

Healthcare revenues were $159.8 million in the third quarter, an increase of 27.7% over the prior year quarter. For the first nine months of 2009, healthcare revenues were $446.9 million, an increase of 21.1% over the prior year period.

As a reminder, healthcare revenues only included those revenues from healthcare service contracts that continue to operate subsequent to the end of the third quarter of 2009, due to the accounting requirements related to discontinued operations.

US GAAP 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 our expired healthcare service contracts, total revenues were essentially the same as continuing healthcare revenues at $159.8 million in the third quarter, an increase of 23.4% from the prior year quarter. Total revenues for the first nine months of 2009 were $449.4 million, an increase of 17.1% from the prior year period.

The significant increase in both continuing healthcare revenues and total revenues from the prior periods is primarily the result of the company’s contract with the Michigan DOC. The company started providing healthcare services under this contract on April 1 of this year.

Healthcare expenses from continuing contracts were $150.1 million in the third quarter and $415.7 million in the first nine months of 2009. In the prior year, healthcare expenses were $113.6 million in the third quarter and $338.3 million in the first nine months of 2008.

Healthcare expenses were negatively impacted in the third quarter of 2009 as a result of the company increasing by approximately $2.5 million, which is an estimate of off-site inmates' medical claims expense, heard but not recorded, related to services provided in the second quarter under the company's State of Michigan Department of Corrections contract. The increase in estimated inmate medical claims expense related entirely to an unanticipated increase in claims for the second quarter dates of service that were processed during the month of August by the company's provider network subcontractor under this contract.

Total healthcare expenses, which included healthcare expenses from expired healthcare service contracts, and excludes share-based compensation expenses, were $150.2 million in the third quarter as compared with $117.7 million in the prior year quarter. For the first nine months of 2009, total healthcare expenses were $418.7 million as compared with $352.5 million in the prior year period.

Gross margin from continuing contracts was $9.7 million in the third quarter. This represents 6.1% of healthcare revenues and compares with 9.2% in the prior year quarter. Gross margin from continuing contracts for the first nine months of 2009 was $31.2 million or 7% of healthcare revenues as compared with 8.3% in the prior year period.

Total gross margin, which includes revenues and expenses from expired healthcare service contracts and exclude share-based compensation expense was $9.5 million or 6% of total revenues in the third quarter and compares with 9.1% in the prior year quarter. For the first nine months of 2009, total gross margin was $30.7 million or 6.8% of total revenues as compared with 8.2% in the prior year period.

It should be noted that total gross margin percentages were very similar to the prior year third quarter and year-to-date periods for the contract portfolio, excluding Michigan.

Selling, general, and administrative expenses were $6.6 million in the third quarter as compared with $7.5 million in the prior year quarter. Included in selling, general, and administrative expenses is $442,000 and $494,000 of share-based compensation expense in the third quarters of 2009 and 2008 respectively.

For the first nine months of 2009, selling, general, and administrative expenses were $21.3 million as compared with $20.8 million in the prior year period. Included in selling, general, and administrative expenses is share-based compensation expense of $1.3 million in the first nine months of 2009 and $1.6 million in the prior year period.

Excluding share-based compensation expense, selling, general, and administrative expenses were 3.8% of total revenues for the third quarter, down from 5.4% in the prior year quarter. For the first nine months of 2009, selling, general, and administrative expenses, excluding share-based compensation expense, were 4.4% of total revenues, reduced from 5% in the prior year period.

Adjusted EBITDA was $3.4 million in the third quarter, impacted by the $2.5 million increased estimate of Michigan DOC inmate claims expenses incurred related to the previous quarter. This compares with adjusted EBITDA of $4.8 million in the prior year quarter. For the first nine months of 2009, adjusted EBITDA was $10.8 million, as compared with $12.2 million in the prior year period.

Depreciation and amortization expense was $662,000 in the third quarter. This is compared with $929,000 in the prior year quarter. For the first nine months of 2009, depreciation and amortization expense was $2.0 million, as compared with $2.8 million in the prior year period.

Net interest expense was $28,000 in the third quarter. This is compared to $176,000 in the prior year quarter. For the first nine months of 2009, net interest expense was $148,000 as compared with $625,000 in the prior year period.

The income tax provision related to continuing operations for the third quarter of 2009 was $649,000. This compares with $368,000 in the prior year quarter. For the first nine months of 2009, the income tax provision related to continuing operations was $2.9 million, as compared with $1.7 million in the prior year period.

Income from continuing operations after taxes was $844,000 in the third quarter of 2009, as compared with $254,000 in the prior year quarter. For the first nine months of 2009, income from continuing operations after taxes was $3.8 million, as compared with $2.2 million in the prior year period.

The loss from discontinued operations, net of taxes was $128,000 in the third quarter of 2009, as compared with income of $94,000 in the prior year quarter. For the first nine months of 2009, we incurred a loss from discontinued operations net of taxes of $324,000 as compared with income of $473,000 in the prior year period.

Net income for the third quarter of 2009, which was impacted by the $0.06 per diluted common share after tax of legal fees related to shareholder litigation, was $716,000 or $0.08 per common share, basic and diluted. This compares with $348,000 or $0.04 per common share, basic and diluted, in the prior year quarter. For the first nine months of 2009, net income was $3.5 million or $0.39 per common share basic and diluted, once again impacted by the $0.06 per diluted common share after tax of legal fees related to shareholder litigation, as compared with net income of $2.7 million or $0.29 per common share basic and diluted in the prior year period.

Cash balances increased to $35.6 million at September 30, 2009 from $31.5 million at the end of the second quarter and $24.9 million at the end of 2008. The company remained debt-free as of September 30, 2009.

Days sales outstanding and accounts receivable were 29 days at September 30, 2009 as compared with 27 days at June 30, 2009 and 31 days at December 31, 2008.

Net cash provided by operating activities was $5.7 million in the third quarter of 2009, as compared with $7.7 million in the prior year quarter. For the first nine months of 2009, net cash provided by operating activities was $16 million as compared with $17 million in the prior year period.

During the third quarter, the company repurchased and retired 51,600 shares of its common stock for approximately $900,000. Since the inception of the current $15 million stock repurchase program, the company has repurchased and retired 508,350 shares of its common stock for approximately $5.9 million.

The Board of Directors has declared a quarterly cash dividend of $0.05 per common share, which will be payable on December 9, 2009 to shareholders of record on November 18, 2009.

Based upon our third quarter financial performance and our somewhat tempered short-term gross margin expectations under the Michigan DOC contract, we are reducing our guidance for full year 2009 financial results.

We now expect gross margin on total revenues to be around 7.0% for 2009, versus our previous expectations of 7.6%. Total revenues are expected to be in the $605 million to $610 million range. We now expect net income for 2009 to be approximately $5.9 million, down from previous expectations of $8.0 million. Due to the reduction in anticipated net income, we now expect net income for diluted common shares to be approximately $0.65 per share for the full year, down from our previous expectations of $0.88 per share. The new guidance of $0.65 per diluted common share for 2009 includes the impact of the $0.06 per diluted common share after tax on legal fees related to our shareholder litigation.

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. 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) And our first question comes from the line of Mike Lamb with Wealth Monitors, Inc. Please proceed with your question.

Mike Lamb – Wealth Monitors, Inc.

Good morning, gentlemen. A couple of questions. First of all, Michigan, that flowed through and was problematic through June, if I understand it correct?

Richard Hallworth

Yes.

Mike Lamb – Wealth Monitors, Inc.

You didn't receive notification until August, is that correct?

Richard Hallworth

We received the surprise in August – is when we received the claims that were related to the second quarter over and above the levels that we had expected, when we got a large froth of claims reported to Etnar by providers.

Mike Lamb – Wealth Monitors, Inc.

Are the state employees now utilizing your system of daily notification of transfer out of the facility, the reason for that, et cetera? So that there is a direct line of communication currently?

Richard Hallworth

The system has been in place since April 1. We got a six-week start-up on this contract and the system was designed to have the state employees logging those inmates who are being transported off-site. The system was in place as of April 1. The compliance with that system was not nearly as accurate or as complete as we would have liked. Over the last several months, through training and re-training of employees, refinement of systems and protocols, cooperating with Michigan DOC to train their employees, we have seen much improved adherence to that. We have seen a marked improvement in the days and the trend in the off-site transports for both emergency and inpatient days as I mentioned earlier over the first few months of the contracts to the current time and right through October to date.

Mike Lamb – Wealth Monitors, Inc.

Is this somewhat a function of going from a cost-plus structure that was previously there to a risk-sharing format that is currently in place?

Richard Hallworth

There are significant differences in the contract structure from the prior vendor to ours. The structure that was in place before had that off-site costs were – the cost of those off-site trips were borne by the State and the vendor received a percentage of the costs that were incurred.

Under the model we have with the Michigan DOC, under our contract, is a shared-risk model, where we are both incentivized to make sure that the care is appropriately rendered, either on-site or off-site, but incentivized to try to render as many of those services on-site as possible. That is a change in the culture of the Michigan DOC for both the providers that we now employ as well as for the Michigan DOC employees. And it is a full culture shift as well as a financial and risk model change from the prior contract. It takes time to effect that kind of change.

We are pleased with the cooperation we are getting, I don't want anyone to read into this that we are getting resistance to it. It is just a culture change from the culture that had been in place for 10+ years prior to our arrival. And so we are making great progress, our partnership with the Michigan DOC is extremely strong and we really are optimistic that this financial underperformance and the surprise that happened out of the gate was an early contract transition issue and that the cooperation that we are receiving now will result in much-improved results as we progress in this contract term.

Mike Lamb – Wealth Monitors, Inc.

Is it fair to say that the DOC is working diligently with you to solve this issue?

Richard Hallworth

I think that is a fair statement. As I mentioned, they are financially motivated to cooperate with us as well as just their managerial style is to cooperate. They share in the risks of this contract. And so, every additional off-site transport, which is expensive, they share a piece of that burden. And so it is in their financial interest as well as their managerial style, their healthcare strategy, to cooperate with us. And we are meeting no resistance in this. It is purely a training and re-training effort that we have been undergoing.

Mike Lamb – Wealth Monitors Inc.

Thanks, Rich. Let me ask one other question regarding the outlook. Is Jon with you, or – it has do with new opportunities.

Richard Hallworth

Jon Walker is here, and ready to answer your questions, Mike.

Mike Lamb – Wealth Monitors Inc.

Good morning, Jon. Regarding – let us just take three states in particular, and I think the future really will rest on the budget deficit that these states are anticipated to have in both fiscal 2010 and fiscal 2011 specifically. Can you comment on Arizona and the law which requires it to come out in an RFP by year end? And then the opportunities and potential timing and size of North Carolina and Georgia, please?

Jon Walker

Yes, I will start with Arizona, Mike. As we have previously reported, the budget bill that was passed requires the RFP to be added in January of 2010, with an award date and a contract no later than May 1 for Arizona. So we have no reason to believe that they are not moving down that timeline right now.

In regards to North Carolina, again, new information to us recently obtained is that they also have passed a budget bill that will require them to put out an RFP by April 1 of 2010. There is no other information except for that RFP must be out by 2010 in regards to North Carolina. There are approximately 40,000 inmates and until I see some scope on that line of work, I would be hesitant to put any type of dollar or number on that potential opportunity.

I am sorry?

Mike Lamb – Wealth Monitors, Inc.

Do you anticipate both of those to be full-service, versus segmenting different functions?

Jon Walker

I think both states are looking, Mike, at all options and evaluating what they want to do before they put their RFP out.

Richard Hallworth

It is too early to tell what the scope of the services will be. We expect them both to be significant, but we don't know the full scope.

Mike Lamb – Wealth Monitors, Inc.

Okay, great. Did North Carolina look too privatized, maybe 8-10 years ago?

Jon Walker

There was an initiative to review privatization, I think roughly in that timeframe, Mike, that never really got very far. There was a conversation at the legislator level at that point, but it did not turn into an RFP as I recall.

Mike Lamb – Wealth Monitors, Inc.

No, it never did. Okay, and the status on Georgia then?

Jon Walker

Stepping back just one second, Mike, on Arizona, just want to inform you that the size of the inmate population in Arizona is roughly 40,000 at this particular point.

Georgia, with an inmate population estimated at 60,000, currently being provided by the Medical College of Georgia is looking at putting out an RFP in the spring, March-April timeline is the best I can tell right now to go forward there.

Mike Lamb – Wealth Monitors, Inc.

Okay, great. Thank you, gentlemen.

Richard Hallworth

Thanks, Mike.

Operator

Thank you. Our next question comes from Kevin Campbell with Avondale Partners. Please proceed with your questions.

Wes Huffman – Avondale Partners

Hi, good morning. This is Wes Huffman sitting in for Kevin this morning. And I got on a couple of minutes late. So I apologize if I am restating a couple of things that you have already mentioned, but, just a couple of things about Michigan. What exactly gives you the confidence that we won't see similar submissions of claims from Etnar in November that could impact the fourth quarter?

Richard Hallworth

As I mentioned in my opening comments, Wes, the course of this surprise was the logging of the inmates who require off-site transport and that services, those logs are maintained by the Michigan DOC employees. And now that it took a training effort to get them to log the inmates, their compliance with that was not as good as we had hoped or anticipated. It was coupled with the fact that we do not process the claims for the largest portion of the outside providers. They are processed through Etnar and so Etnar was surprised to receive some very large late claims in August that had not been pushed through the logs that are maintained by the Michigan DOC employees.

We have done the training and retraining of those Michigan DOC employees in conjunction with the DOC management and we are seeing marked improvement in the compliance with and reporting out of that on a daily basis – transports on a daily basis. We have also seen improvements in the actual number of emergency room and in-patient days that we are experiencing in recent months compared to the early months of the contract, representing the management of those off-site trips. Once we become aware of them, we can then better manage the in-patient days to assure that the care is coordinated and the inmate is returned to prison under our care at the earliest possible time, therefore decreasing length of stay. So getting those logs right upfront and complete is a key issue for us and we have been re-training employees of Michigan DOC for the last several months.

Mike Taylor

Wes, this is Mike Taylor. In addition to the upfront reporting in this most critical phase, I would also point out that we have almost doubled the experience now of paid claims data compares to reporting out the results three months ago. So we have paid roughly four months of claims that Etnar had on our behalf four months of claims in late July since this contract started, and now we have seen seven months of data. So that gives us more confidence with a greater data set to analyze some of the back-end data on the pay claims that is coming out in Etnar as well.

Wes Huffman – Avondale Partners

Okay, thanks. That is very helpful. And mentioning a few things about litigation costs, why were the legal fees prior to the third quarter non-expensed previously?

Richard Hallworth

Most were, most of these were incurred in the third quarter.

Wes Huffman – Avondale Partners

Most were, okay. And do you have a timeline on a potential settlement there?

Richard Hallworth

Unfortunately, we don't. We are in mediation, and as I said, the mediation process was confidential, but we are going to pursue this matter but we cannot give you a timeline on – what we will do is continually assess our reserve levels and in each balance sheet date, we will – based on the facts, we will make adjustments if they are necessary at that time.

Wes Huffman – Avondale Partners

Okay. And one quick question about guidance. Excluding the legal fees and the costs from Michigan, EPS would have been about $0.29. But I guess the implied guidance for the fourth quarter would be about $0.26. Are you expecting a sequential decline there, or not, or –?

Richard Hallworth

Yes, Wes, I think what I would point back to you is some of our earlier comments, because I think this has gotten a little bit lost in this announcement potentially is that almost everywhere else, everything was operating at a very, very high-level the third quarter, which exceeded our expectations. And so, there is a little bit of caution in our own lines, can that be repeated quarter after quarter after quarter, one example of that being the professional liability expense, which has been a negative impact to results for some of the quarters look very, very minimal in Q3, better than most people would expect to be on a run rate every quarter. So there were so many things that were really at an optimal level in the quarter. I have specifically mentioned that there is a little bit of expectation but it won't be quite great everywhere else, even though we expect more out of Michigan, we have to have a little bit of caution, as we can't just guide to the best outcome.

Wes Huffman – Avondale Partners

Okay, thank you.

Operator

(Operator instructions).

Our next question comes from Alex Washburn with Columbia Pacific. Please proceed with your questions.

Alex Washburn – Columbia Pacific

Good morning, Rich and Mike. I would like you to address the use of cash, given that your stock at $13.5 is trading at roughly three-and-a-half times run rate enterprise value of EBITDA.

Mike Taylor

Well, Alex, this is Mike. Let me start with that. You know, certainly, we have utilized our repurchase programs historically as a company, to be opportunistic, to take advantage of opportunities when the price of the stock may be impacted for whatever reason and those – we are structured that way to allow us to be opportunistic of the level of purchases in any given quarter, so you know all that is obviously subject to SEC regulations and requirements, but we do think that as an opportunity for the company and its shareholders. We continue to think dividends are an opportunity for the company's shareholders to receive value each quarter on a more steady basis, and that is why we started the dividend program last quarter and we continue it and we will see what the future holds on that, but we think that is another good use of capital for the company.

You know, the balance sheet right now is the best it has been in terms of cash and no debt. So the other opportunities that we will examine as they are out there, we are beginning M&A activities that could benefit shareholders to a higher degree long term as well.

Alex Washburn – Columbia Pacific

Given that we have the largest pipeline in front of us in the company's history, I for one encourage you to buy as many shares as you can at these levels and allow longer-term shareholders to participate more greatly in the future outside the business. I appreciate the time.

Richard Hallworth

Duly noted, thanks.

Operator

Thank you. Mr. Hallworth, 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 provisions of the Private Securities Litigation Reform Act of 1995. As such, they involve risk and uncertainty that actual 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 GAAP 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.

Richard Hallworth

Thank you.

Operator

Thank you. Ladies and gentlemen, that concludes our conference call for today. We thank you for your participation and ask that you please disconnect your lines. Have a good day.

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