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Executives

Allison Vigler - Cameron Associates

Fletcher McCusker - Chairman & CEO

Michael Deitch - CFO

Craig Norris - COO

Herman Schwarz - CEO, LogistiCare

Leamon Crooms - CSO

Analysts

Odnik Reising - CJS Securities

Wes Hufffman - Avondale Partner

Kevin Ellich - RBC Capital Markets

Brandon Osten - Venator Capital

Peter Park - Park West Asset Management

Rick D’Auteuil - Columbia Management

Tyson Bauer - Wealth Monitors, Inc.

The Providence Service Corporation (PRSC) Q1 2010 Earnings Call May 6, 2010 11:00 AM ET

Operator

Good day ladies and gentlemen and welcome to the first quarter 2010 Providence Service Corporation earnings conference call. At this time all participants are in listen only mode. We will be facilitating a question-and-answer session towards the end of today’s conference. (Operator Instructions) As a reminder this conference is being recorded for replay purposes.

I’ll now turn the presentation over to Alison Ziegler of Cameron Associates.

Alison Ziegler

Thanks (inaudible). Good morning everyone and thank you for joining us this morning for Providence’s conference call and webcast to discuss its financial results for the first quarter ended March 31, 2010. You should have all received a copy of the press release last night. If you would like to be added to our email list please call Devin Rhoades at 212-554-5461.

Before we begin please note that we have arranged for a replay of this call, the replay will be available approximately one hour after the call’s conclusion and will remain available until May 13. The replay number is 888-286-8010 with the pass code 24914056. This call is also being webcast live with a replay available. To access the webcast go to www.provcorp.com and look under the event calendar on the IR page.

Before we get started I’d like to remind everyone of the Safe Harbor statement included in the press release and that the cautionary statements apply to today’s conference call as well. During the course of this call the company will make projections or other forward-looking statements regarding future events or the company’s beliefs about its financials results for 2010 and beyond.

We wish to caution you that such statements are just predictions and involve risks and uncertainties. Actual results may differ materially. Factors which may affect actual results are detailed in the company’s filings with the SEC including the company’s 10-K. The company’s forecast are dynamic and subject to change. Therefore these forecasts speak only as of the date of this webcast, May 6, 2010. The company may choose from time-to-time to update them and if they do will disseminate the updates to the investing public.

I’d now like to turn the call over to Fletcher McCusker, Chairman and CEO. Go ahead Fletcher.

Fletcher McCusker

Thank you very much Allison and good morning everyone. In Tucson today with me is Craig Norris, our Chief Operating Officer; Michael Deitch, our CFO; and introducing Leamon Crooms, our new Chief Strategy Officer on the line from Atlanta is Herman Schwarz, CEO of LogistiCare and is always we’ll all be available for your questions following our scripted remarks. We are coming of the most amazing quarter we have ever experienced and clearly in a remarkable position as a company when you consider we’ve remained embedded in a recession with many if not all of our state payers still struggling with budget deficits.

Now since the creation of Medicaid has there been the kind of congressional support for America’s indigent that we are collectively witnessing today. The Health Care Reform Legislation will increase Medicaid by 33% bringing the number of enrollees to around 70 million people literally one in every six Americans. Equally as important in the bill are the mandates for states to develop home-based delivery systems something this company pioneered in 1997.

The bill also includes what is called the maintenance of efforts section that requires states to maintain the Medicaid plan at stimulus levels established by the February 2009, Medicaid stimulus legislation. This is called states like Arizona to reverse anticipated reductions to Medicaid eligibility. States remain stymied as well in their attempts to reduce Medicaid rates due to the advocacy group led actions in federal court resulting in a number of co-beneficiary rulings. We are seeing in a new round of litigation is a number of Republican led states have actually sued the federal government over the mandates in the Healthcare Reform bill. This pro-Medicaid spending environment is certainly partisan, but so was the initial legislation adopted in the 60s.

The combined effect of this environment has flattened down our rates, but continues to pump volume as state shift away from the more expensive out-of-home providers even before the class act in the pro-home-based language of the reform bill. There is an earlier doctor provision in the bill and we do expect some states will move to attract federal dollars long before the 2014 start date.

Our news on a couple of other fronts, we did win the arbitration in Canada and British Columbia. The 3 million and change dollars that are recoup there will be returned to us that will not affect our earnings but as good news in terms of our situation in Canada and on LogistiCare front we had a very interesting situation developed in Idaho, where basically our proposal was disqualified when the state of Idaho gave LogistiCare a zero score due to their historical financial section being presented under the name Charter LCI which was the holding company when Charterhouse own LogistiCare before we acquired in, otherwise they would have won that bid, but we are essentially viewed as non-responsive. All this basically to provide a backdrop for you and reviewing are now fifth record quarter in a row benefiting from these trends benefiting from our ability to manage costs and blessed with virtually no turnover of our key personnel. Then Michael will walk you through the particulars in the quarter. Mike?

Michael Deitch

Thanks, Fletcher. In our first quarter of 2010, revenue totaled almost $221 million which was a record quarter for us, up from $186.7 million for the first quarter of 2009, 19.3% increase. All the increase was from internal organic growth.

For the three months ended March 31, 2010 as compared to the three months ended March 31, 2009, home based revenue grew 5.2%. Foster care revenue declined by 2.4% or about $213,000. The decline is mostly attributable to our Tennessee foster care operations, which is increasing its home-based services as part of its efforts to offsets its reduction in foster care services.

Management fee revenue declined by 8.3% due to renegotiated management services contract since the year ago and an operational restructuring at one of the manage entity. Transportation services revenue grew by 13.5%, primarily due to the New Jersey contract which began in July 2009 and various other new contract wins.

First quarter operating income, which was also a record for us totaled $19.9 million, which was 9% of our revenue. This compares to $15 million and about 8.1% of revenue for the first quarter of last year. First quarter net income also a record totaled $9.1 million, which was 4.1% of our revenue. This compares to almost $5.9 million and 3.1% of revenue for the first quarter of last year.

First quarter diluted earnings per share totaled $0.66 with approximately $14.9 million diluted shares outstanding. This compares to $0.44 and approximately $14.9 million diluted shares outstanding for the first quarter of last year. The diluted earnings per share amounts for Q1 of this year and last year are not readily computed from the income statements.

The computation results from the effect of accounting for our convertible debt under statement of accounting standards codification topic 260 earnings per share. I would like to direct you to footnote number 10 in our Form 10-Q which discloses the details of our earnings per share computations.

The financial results in Q1 include approximately $1.9 million in operational and administrative incentive compensation expense of which $471,000 is recorded in client service expense, $353,000 is recorded in cost for transportation services and $1.1 million is recorded in general and administrative expense. At the end of our first quarter our days sales outstanding was 39 days and management fees day sales outstanding was a 184 days. At the end of our first quarter we had $55.5 million in unrestricted cash. Cash provided by operating activities totaled almost $15.4 million in the quarter, which was a first quarter record for us. As of today we have not needed to draw any funds from our revolving line of credit to find ongoing operations.

With that I’ll turn the call over to Craig Norris, our COO.

Craig Norris

Thank you, Michael. For the quarter our direct client census on the social service side was approximately 62,000 clients which is an increase of over 2,500 clients compared to the same quarter of 2009. In addition we are closed to 7.9 individuals eligible to receive services under our LogistiCare division. This is an increase of approximately 300,000 eligible clients compared to Q1 of 2009.

All clients were being served from 430 local offices in 43 states, the District of Colombia and Canada combined between our owned and managed entities there are over 10,000 employees serving 1,030 government contracts. Overall this was certainly a good quarter for LogistiCare, the social service sides well manage to stay on budget even with the extreme weather disruptions in the east during the month of February primarily affecting the fee-for-service side of our business. We are still hearing the background noise of state budget deficits and states are still dribbling program priorities and funding initiatives, however as Fletcher mentioned the stimulus funding and healthcare reform seems to be contributing to the stability of our systems overall. We are continuing to monitor these challenges that may arise in our states as well as prepared for our continued client demand and enrollment within both segments of the operations.

I’m pleased with how we start 2010, the operations continually stay efficient and we are seeing mostly consistent budget performance and productivity across our regions. Thank you and I’ll turn it over to Herman Schwarz the CEO for LogistiCare.

Herman Schwarz

Thanks, Craig and good morning everyone. During the membership growth in many of our programs and the new contracts we’ve added since June 2009 we did anticipate strong first quarter results relative to last year. That being said the actual performance was better than expected due to a favorable variance and transportation expense. Our gross margins percent, which was budgeted to remain basically flat in fact improved by nearly two points in the first quarter.

This improvement can be primarily attributed to the positive impact, the bad weather that Craig alluded to has on our utilization level. Our continued focus on lower cost transportation alternatives as well as a pickup and payroll expenditures. You will recall that the East Coast in particular had several major snowstorms during the quarter, which resulted in significant trip cancellations in many of our markets. Our portion of these trips do ultimately get run in subsequently weeks, those trips associated with the adult day care or mental health services are paramilitary canceled and therefore do not generate in associated expense in the period.

Additionally we have been able to reduce our trip unit cost in several markets by expanding our provider networks, and shifting volume to lower cost options like mass transit. The payroll variances at function of a delayed investment in Human Resources, while we won’t fill all of the rolls budgeted, much of the savings is related to open positions that still need to be filled, in order to ensure our ability to serve our clients effectively.

In spite of the Idaho loss our sales pipeline remains active. We are waiting decisions on statewide RFPs from Nebraska and Iowa, which are both Greenfield opportunities. As well as an eight county region of Minnesota, which is presently managed by our competitor. We continue to grow our presence from managed care programs and are implementing a few smaller contracts were $3 to $5 million during the summer months. In general, I am pleased with our first quarter performance and commend our management teams for their diligent focus on maintaining efficient operations in the face of the increased volume demands.

We remain concerned about budget pressure in certain states and are in discussions with specific clients regarding future program rates. I’d like to now introduced Leamon Crooms to give you a brief update.

Leamon Crooms III

Thank you, Herman. Let me first start by saying that I am happy to be a part of the team especially on this side of healthcare reform. And during what promises to be an exciting time for problems. My role is to further develop and drive our strategy as we look to capitalize on developing growth opportunities. Areas of opportunity for province exist with the continued focus on our vision; hoping those were most in need by delivering human services with our loss. We view several opportunities are significant for us to delivery the same or very similar services to new payer client segments. And we are working on strategic initiatives in the following areas.

Services to seniors, which is a market that has estimated to grow to just over 100 billion by 2017. DoD/VA, a market that will because of budgetary issues need to continue to shift to more cost effective human service for active military invest. And redirected tension to behavioral health services to address record high suicide rates currently greater than the general population. The fiscal year 2010 budget requested 47.4 billion total for the unified medical budget of the military health system and that budget has grown by approximately 15% per year since fiscal 2000. And of course health care reform which is expected to increase medicate roles by adding 16 million new recipients, deliver mental health parity that will put attention in financial focus on mental and behavioral health services as a part of a total plan of care and boost community health by adding $11 billion over the next 10 years to community health centers and provide another community partner in delivering behavioral health care to 20 million new low income patients.

As we work through our strategic initiative process we will be identifying acting upon opportunities that align with our strategy. To that end, we are currently engaged in number of activities that we expect to yield the results. For example, we are working with each state on a business marketing plan to booster our organic growth and our pull through across service lines. We are identifying and aligning ourselves as industry specialist to increase the effectiveness of our strategic decisions.

We are meeting with and targeting M&A types to help, find the acquisition targets that best reflect our strategy and developing business model. We are working with each state to understand how reform will impact their payers and clients and developing options designed to move us to the best possible position as reform unfolds.

Of course we are continuing to maintain focus on our existing business by supporting organic and acquisitive growth in our core social services and non-emergency transportation businesses as we have always done. And with that I will turn the call back over to Fletcher.

Fletcher McCusker

Thank you very much, as you can see this is a remarkable time for us, if not only survive the 2008 recession for a striving today and in a position to play offence in a market that favors our business model. We expect to grow, we expect to diversify and we in fact may be the company best position to take advantage of health care reform.

We have guided out for the remainder of the year, basically picking up our Q1 earnings anticipating the accrual of our 60%, deep bonus plan and staying on budget for the rest of the year. This guidance assumes no new contract wins, no new acquisitions. And with that Grace Ann we’ll open the line for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Bob Labick of CJS Securities.

Odnik Reising - CJS Securities

Good morning, gentlemen. This is Odnik Reising filling in for Bob Labick. I wanted to just ask for another update. You commented briefly on Nebraska, Iowa and Minnesota. Can you give us a little bit further update and more color on those situations with respect to the pipeline and the rebids?

Herman Schwarz

Sure, and all three of those cases Nebraska, Iowa and Minnesota we have already submitted responses to the RFPs and basically at this point are awaiting action on the states, either through (inaudible) or decisions. Minnesota was suppose to have already been out, but is customers in these situation, the decisions usually get delayed and we don’t get anymore information until they decide to give it to us, so basically in all three cases we’re now waiting to see what happens and you know hopefully we’ll get a positive indication and immediately move into implementation mode.

Odnik Reising - CJS Securities

Okay, and what about last quarter Connecticut and Delaware as well?

Herman Schwarz

Those are rebids. We're the incumbent in Delaware. We have the entire state in Delaware and Connecticut we spilt the state and both of those are scheduled later in the year to come out with new RFPs, but at this point nothing has been let out so we are still actively providing services up there.

Odnik Reising - CJS Securities

My second question is, with respect to the social services segment. What’s the acquisition environment looking like? Are you still seeing multiples in kind of the four to five range of I think of likely targets and any further color on the area that you could give?

Fletcher McCusker

The target environment is rich, a lot of the smaller providers that have been kind of our niche business, have struggled in the recession we are in a position now, we can fund some of those kind of acquisitions for cash we have a number that we are in conversations with and would expect to be able the close something in either Q3 or Q4.

Operator

Your next question comes from the line of Kevin Campbell of Avondale Partners.

Wes Huffman - Avondale Partners

This is Wes Huffman on for Kevin Campbell. First, I just want to touch on 2010 guidance. It appears to be a little conservative if you based on first-quarter results and second-quarter guidance results in the second half, only have to be about $0.35 to $0.39. Can you talk a little bit about when it might be below in the second half?

Fletcher McCusker

What we’ve done with is basically stay with our budget. Remember our states fiscal year is July 1, so we really haven’t heard anything yet from them dependently to give us any indication I have to change what we’ve budgeted for the back half of the year. So we picked up the actual results of Q1 and basically the budgeted results for the remaining three quarters. Remember that Q3 is dramatically seasonal for us and earnings drop off quite dramatically in that quarter typically our margins are half in Q3 they what they would be in Q2. So you will have probably a pretty routine Q2 for us dramatic drop in earnings in Q3 and then based upon the contract renewal we should have a pretty good Q4. So we will have further information on those out quarters as we renew our contracts but for the moment we’re assuming that we achieve our budgeting results that will trigger the bonus plan that we also guided to that $0.16 that we mentioned will be accrued over the remaining three quarters.

Wes Huffman - Avondale Partners

Okay. And so I guess, so what you’re saying is compared to 2009 that the seasonality you saw from 2Q to 3Q and then the increase from 3Q to 4Q could possibly track along that sort of same way?

Fletcher McCusker

That’s pretty much the way we budgeted it, Wes, yes.

Wes Huffman - Avondale Partners

The next thing I want to talk about is the social services segment. I think the census was up about 4% on a year-over-year basis. What should we expect there going forward?

Craig Norris

Again the summer we see a dip primarily due to the school based programs see a dip from the summer certainly. I suspect that you continue to see some incremental growth with exceptional dipping in the summer because of our school programs.

Fletcher McCusker

Two things that have affected that quite dramatically over the last year, Wes, not which of course as the Medicaid enrollment and that was driven to large extent by the recession that ranges than employment numbers indicate that that is leveling off so we would expect Medicaid enrollment to stabilize until the healthcare reform initiatives kick in. As we mentioned some states early adopt that so there will still be some enrollment or eligibility drivers but moreover what we are seeing is a dramatic shift in the referral patterns moving away from these expensive out of home programs like residential treatment and psychiatric hospital care that’s favor us. So, we would expect other than the summer seasonality that we would continue to see census pickup through 2010.

Wes Huffman - Avondale Partners

Okay, that’s very helpful. And just another question or the first question on LogistiCare as it relates to utilization. If that was more in a normal level during the quarter could you give us your best estimate on what a percent of the cost of net services would be? Or as a percent of LogistiCare revenues?

Michael Deitch

Wes, let me jump into that. I will tell you what it is, what we have budgeted for the year. EBITDA margins of 7.7%, operating income margins of 6.4%. Obviously, due to the seasonality that will be a little higher in Q1, Q2 and lower in Q3 as Fletcher has suggested.

Fletcher McCusker

For those of you that model our business, I think we’ve budgeted a combined margin, Michael correct me if I’m wrong, right around 7%.

Michael Deitch

Combined with the corporate, including that overhead operating income of margin of 5.5%, EBITDA of 7.1%.

Fletcher McCusker

And that’s pretty much what we’ve guided to so the remainder of the year.

Wes Huffman - Avondale Partners

Okay. And one final question based on the share count. Michael, you might have touched on this in your opening remarks. If you did I missed it, I’m sorry. But what is the net income threshold that triggers an inclusion of the converse shares in the diluted share count?

Michael Deitch

It’s about $0.43 to $0.44, when you give those out, it triggers the converts to being diluted.

Wes Huffman - Avondale Partners

Okay, that is very helpful. Thank you very much for taking my questions.

Operator

Your next question comes from the line of Kevin Ellich of RBC Capital Markets.

Kevin Ellich - RBC Capital Markets

Good morning, thanks for taking my questions. Just wanted to go back to the incentive comp payments. Just wondering what the thresholds are for that and as the amount that you guys are paying out lower than it was last quarter, I thought you guys indicated it wouldn’t be above $0.39 or did that include payment increases for other employees?

Fletcher McCusker

A good question, Kevin. Our bonus plan has triggered by its team plan, it’s about 60 people deep, it’s roughly $6 million in total. It’s triggered by the company’s overall performance beating plan volume enough to accrue the bonus. So, in other words, not only do we have to beat plan, but we have to beat the plan plus the accrual. Given the unbelievable performance in Q1, normally you would not see us accruing bonus expense this early in the year, but given that unbelievable performance we began to accrue for that starting in Q1, I think we had accrued about $0.08, Michael in Q1 and another $0.16 Kevin for the remainder of the year. So the total cost of the bonus plans are about $0.25 on an earnings per share basis.

Kevin Ellich - RBC Capital Markets

Okay. And then relative to I think last quarter you guys said it was going to be $0.39 and maybe I have that wrong.

Fletcher McCusker

These are non budgeted incentive programs so we may be talking about two different things. So, what was not budgeted and as based upon company performances that $0.25 bonus we just talked about.

Kevin Ellich - RBC Capital Markets

Okay. And then I guess looking at the seasonal impact on the transportation business, which relative to my estimate provided a lot of the upside. Just wondering how great of an impact that was if you guys have parsed that out. And obviously it seems like some of those expenses should come back.

Fletcher McCusker

The overall margin as Herman suggested, was about 200 basis points better than we budgeted, I can’t really tell you how much of that was rather versus personnel savings with the two things that affected that were whether in some attrition on personnel and then you have any additional information.

Herman Schwarz

Yeah, I mean if you're referring to seasonality as the weather, I would tell you that about 25% to 40% of the pick up was weather related in the markets where it hit and its obviously a hard thing to predict because if we get hurricanes in the summer months we will get some pick up down in Florida and along the East coast and then depending on weather patterns in the fourth quarter, you might get some early snow. The weather is obviously unpredictable, we just happen to have a really bad or good depending on how to look at first quarter in a lot of our markets and we had some markets for instance, Delaware where we basically put it run at all because of the state of emergency and we didn’t incur any expense in that market for those couple of days in fact the national guard was even having to transport folks for dialysis because our vehicles when lot on the road, so when that happens we don’t encouraging expense under a capitated program that goes primarily to our benefit, so.

Craig Norris

Might add, Kevin, that it's really the opposite on the social service side and whether it will looks like in Virginia can have dramatic impact on our fee reserves but sort of one in other side when we have bad weather.

Kevin Ellich - RBC Capital Markets

Right. So again (multiple speakers).

Fletcher McCusker

We model that is to trying not anticipated obviously so, I think if you model the business on our historical margins and the impact of whether is typically favorable to that.

Kevin Ellich - RBC Capital Markets

So, just, so I make sure I understand this, you guys are pretty much opposite of other traditional healthcare providers where, because of the capitated arrangements being paid on a per member per month basis you’re collecting the revenues whether the transports happen or not?

Fletcher McCusker

Yeah, any savings that he has on the cost side drops to the bottom line.

Herman Schwarz

And many of the contracts. Some contracts there are causes that doesn’t happen and we have to allow for that back in terms of our rates but for the most part we do benefit and most of our contracts.

Kevin Ellich - RBC Capital Markets

Okay, got it. And then just looking at the home and community based service revenue, looks like it came in at 5% which is where it had been last year. Just wondering what a normalized growth rate is for that segment.

Michael Deitch

Organic growth, it would be somewhere 7% to 10%.

Kevin Ellich - RBC Capital Markets

7% to 10%. So you expect it to pick up again as the year progresses?

Fletcher McCusker

Yeah, we’ve budget for what you would call same store of growth Kevin, in the high single digit.

Kevin Ellich - RBC Capital Markets

Okay, so then either the guidance is pretty conservative or you guys are expecting LogistiCare revenues to pull back later this year?

Fletcher McCusker

We do expect that their earnings will pull back because of the issues we’ve discussed and remember our business drops off dramatically in Q3 and I think that’s probably the part that people in our modeling our business are not looking at is we will vary on any money in Q3. So, you drop on the $0.40 quarter to single digit quarter and that’s really the impact of this summer seasonal.

Kevin Ellich - RBC Capital Markets

Okay, and then just two last questions, Fletcher. I guess I understand that Health Care Reform is a good thing for you from the eligibility perspective. But just wondering what gives you confidence that the rate environment is going to stay stable, especially as we move into the budget season. Conversations you and I have had indicate that you’re pretty comfortable with that range. But yet I think Craig made a comment that you guys continue to monitor it because challenges do come up. So just wondering what gives you that confidence? And then also your acquisition pipeline, wondering where you stand on the Homecare expansion or potential acquisitions in that base? Thanks.

Fletcher McCusker

Rate issue, we have some anxiety about rates given the predicament our states or in however in reality, we are not seeing the kind of rate pressure that the out of home providers have announced. We think that two things that affect that one is that, we can to be low end of the system. So, states they want to incentivize us to increase our volume are not going to be provide rate and on the other hand any state that’s attempted to cut rates California and mainly in North Carolina cheaply have been sued. So, state bureaucrat and cabinet level and governors that we talk to are kind stymied by the external forces that, Kevin, have been both a carrot and a stick, the stick is the federal corner and ACLU prepared to intervene that someone arbitrarily tries to reduce rates in the social services space and the carrot to quarter is the matching program in the health care reform legislation so we have not seen any state other than those two so far try to dramatically attack rates across the board now we’ve expect that we will not enjoy significant rate increases but at the same token we’re not seeing significant rate pressure.

Kevin Ellich - RBC Capital Markets

Got it. And then the acquisitions, homecare?

Fletcher McCusker

We have a pipeline activity we have retained an advisor, its probably too early to tell you how far long we are in any of that space. It’s the new business to us so we have lot to learn as we look to diversify the company with the part of the reason Leamon is on board and what communicating on intend is that we’re very exited about how reformer effects home based care particularly for seniors and we are very enthusiastic about the opportunities that have been presented by the department of defense and if you look at us historically we have both built and bought, when we diversify. So, our inclination is to do something DeNovo and also to try and target our acquisition into those either one of those spaces.

Kevin Ellich - RBC Capital Markets

Got it. Thanks, guys.

Operator

Your next question comes from the line of Brandon Osten of Venator Capital.

Brandon Osten - Venator Capital

Hey, guys. Obviously a great quarter, I think you know that. Just wanted to ask you, what’s your plan in terms, because we’re talking a lot about acquisitions here. What’s your plan in terms of, how are you guys looking at your debt and specifically some of your higher cost debt right now?

Fletcher McCusker

Great question we are going to ask it a lot. The smaller niche acquisition that kind of tuck-in acquisition that we're known for, we can probably fund with internal cash. Any thing is big in 60 obviously would require cash we don’t currently have which would have to be finances to some sort of vehicle, we have past on any kind of starter debt swap and the high yield markets remain very robust however from our perspective there has not a lot of incentives are valued our share holders just to swap out our bank debt for public debt so we’re not inclined to do anything in the high yield market. If you watched us both the radio agencies that recently upgraded us was part of our we were watching for in terms of our ability to refinance the nice thing about our current position is we’re not in any hurry to refinance so we were watching that interest rates we continue to talk to our syndicate which remains very supported of the company and you could engage in a REIT finance particularly if we needed the use of proceeds to fund any kind of acquisition. So for the momentum our attitude is watching the market waiting and seeing not rushing into any kind of refund.

Brandon Osten - Venator Capital

Just in terms of the cash you have on the balance sheet though, do you guys have the ability to pay down your debt and lower some of that interest expense until you guys find another way to use it? Or like are you going to just accumulate cash on the balance sheet like this or are you going to draw down the line and then take it back up later if you need it just cut some of that interest cost in the interim?

Fletcher McCusker

We have prepaid quite of aggressively over the last year and do into 2010 when you look at the value of an acquisition versus a debt reduction the creation is about to same we paid debt down aggressively to get into the three times range and I think we have said publicly in a past that once we got their we likely probably would not be as aggressive with the debt pay down so that cash for us now search two purposes one is strengthens the company as a bidder when states look at our balance sheet and where with all in terms of executing on a proposal and its dry powder for acquisition strategy that would be a accretive without having to go through the finance market.

Brandon Osten - Venator Capital

Can you guys just that contract issue you mentioned with Idaho that it was related to the predecessor company and I think you guys said you were non-responsive. I don’t want to put you guys on the spot too much, but was that an internal screw up or was there just nothing you guys could have done about that because of the history? Like, was it a lack did you guys just not notice in the paperwork that it referred to a predecessor company instead of yourselves?

Fletcher McCusker

It is unbelievably unique situation we have always provided historical financial statements that typically is not an issue when there is a holding company involve particularly with companies that have been held with private equity. The state took a very literal interpretation of that and basically said the names did not match. The name that was on the audit did not match the name of the bidder and therefore we are giving you a score of zero. We never seen it strengthen and you know I think its easy for us to fix and we known that was going to be an issues we would just have the auditors issues the historical audits in the name of bidding entity. So that’s the first time we ever seen incur it begin entirely a regular and unbelievably lateral and its interpretation of historical presentation.

Brandon Osten - Venator Capital

But you guys have fixed the so-called glitch so chances are this doesn’t happen again?

Fletcher McCusker

It’s an easy thing and if we now putting so initiating we can have the audits reissued.

Brandon Osten - Venator Capital

Excellent. And just the last question on the executive bonuses. I kind of caught that explanation there in terms of you guys obviously being way ahead of whatever budget you guys might’ve had internally. To the extent those executive bonuses kick in and potentially scale, you guys have obviously singled out with more disclosure than most companies, would how much the executive bonuses are eating out of the EPS this year. But let’s say, I mean in a hypothetical situation, like incrementally as you’re above budget, do the earnings start to scale up at that point or do the bonuses continue to kick up and eat like half of any beats going forward? Like how should I think of your ability to exceed expectations and what happens to EPS versus how much gets eaten up by executive bonuses at that point?

Fletcher McCusker

It’s a really sharp question. The bonus accrual is at our maximum plan so we are assuming that we were trigger the maximum amount under our current performance level. So the $0.16 that we guided for the remainder of the year would be our maximum exposure to bonus and as deeper than executive an officer bonuses it really the top 60 people in company we like be in transparent about that we debated whether or not we should begin to accrual this early by this pretty obvious to us is going to be and we think it’s helps to shareholders understand the changes expected in the year rather than just thrown it all into Q4. So it’s $6 million program as the maximum exposure.

Operator

And your next question comes from the line of Peter Park with Park West Asset Management

Peter Park - Park West Asset Management

Hi, great quarter. What’s the actual trigger that triggers the incentive comp? Is it a net income threshold or an EBITDA threshold? Thanks.

Fletcher McCusker

It’s an EBITDA threshold plus the accrual. So in other words we have no be EBITDA by more than $6 million.

Peter Park - Park West Asset Management

And what is the actual EBITDA number?

Fletcher McCusker

It’s the non-GAAP numbers; I don’t think we disclose it. But if we look at EPS and basically we have to be our earnings by the tax effect of the accruals. So $6 million tax effect.

Peter Park - Park West Asset Management

So without talking about EBITDA, is it that you had to beat your EPS guidance range?

Fletcher McCusker

We don’t use the EPS that trigger but the impact is the same. Once your tax effect the bonus (inaudible) Cost committee looks at EBITDA to trigger and EBITDA plus the accrual has to be achieved before the bonus is paid. And it’s a team bonus; it’s all in our team bonus. So we have to not only beat plans, but we have to beat plan plus the accrual before it gets paid. And this is typically paid in the spring and the following years. So even though we are accruing this, there has been a no check written obviously to anybody. And one of the reasons we like this is in the events something would happen and we do not achieve the bonus. We have an accrual that can be reversed in the (inaudible).

Peter Park - Park West Asset Management

But was the EBITDA target consistent with the EPS guidance range you initially laid out of $1.32 to $1.35 for the year?

Fletcher McCusker

Absolutely, yes. I brought you this developed in the fields approved by the Board, our EBITDA has calculated from op income with D&A produced at the same EPS. Our three guidance and internal budgets are in fact the same.

Peter Park - Park West Asset Management

I will contact you to follow up off line. Thank you.

Operator

Your next question comes from the line of Rick D’Auteuil of Columbia Management.

Rick D’Auteuil - Columbia Management

Good morning. Just to drill down, last year, the quarter last year was I think impacted by the Avalon fight. Do you have the impact of that so we can compare apples-to-apples on the earnings that you just produced? Do you recall what you spent in Q1 on the Avalon dissident fight?

Michael Deitch

It was between $2 million and $2.5 million, I believe.

Fletcher McCusker

Two or three things affected that, the arrangement fees and amendment fees with the back this time last year and then cost of the proxy buyers and it was between right around $2.5 million to $3 million.

Rick D’Auteuil - Columbia Management

Okay. So just going back to this bonus issue, if we read your fourth quarter earnings release, you talk about a $0.39 number and I actually pulled that out to see what was referenced. So it’s primarily the employee salary freeze and the stock-based compensation expense. You’re saying the bucket that you’re introducing now, the bonus is above and beyond the $0.39 that we’ve already brought back?

Fletcher McCusker

The actual bonuses paid on occurred in the year 2009, so there is no over hang impact for net bones they were all book for last year. This is the bonus plan for 2010 and as triggered by year end 2010 results which would be audited and you know payable in April at 2011, so all of our doing as acknowledging that is likely were going to trip those triggers and net of them accruing at all in the fourth quarter as we did last year were picking it on a quarterly basis

Rick D’Auteuil - Columbia Management

Okay, let me -- now you’ve really confused me. Let me just read the paragraph. For 2010 the Company expects revenue between $850,000 to 870, this is again a quarter ago, "million dollars, an increase of 6% to 9%. The earnings per diluted -- on a diluted basis $1.32 to $1.35 assuming a 40.71 tax rate. And assuming approximately $0.39 worth of expenses not incurred in 2009, primarily the employee salary freeze and stock compensation expense.

Fletcher McCusker

Yeah, that – in the (inaudible) that is reinitiation of the stock comp which will begin for us in queues 3 and 4 and the termination of the salary freeze which benefited us in 209. The impact of those savings was the $0.39 in ‘09 which will not occurred in 2010, so I think you just making up the two programs the $0.39 savings produced part of our ‘09 results came from a year on salary freeze and a year of no stock compensation.

Rick D’Auteuil - Columbia Management

Right, I understand that

Fletcher McCusker

Both of those will be reintroduced and were included in are about 35 guidance that’s how we went on about 60, about 30 –

Rick D’Auteuil - Columbia Management

So the $1.35 had no bonus, just stock-based compensation in the number?

Fletcher McCusker

Right, in salaries at their new levels

Rick D’Auteuil - Columbia Management

Including senior management salaries?

Fletcher McCusker

Yes

Rick D’Auteuil - Columbia Management

And so what did that -- how much of the $0.39 is senior management and how much is the troops?

Fletcher McCusker

We have to go look in that in 8K because the officers obviously have no disclose or new base but we all got new basis January 01.

Rick D’Auteuil - Columbia Management

Okay. I mean -- is a lot -- is the lion’s share of that $0.39 stock-based compensation and raises for senior management or is it pushed down --?

Fletcher McCusker

No the (inaudible) back as the – entered the salary freeze, we can break this out offline.

Rick D’Auteuil - Columbia Management

Okay, I’ll follow up on that question off-line. So, again, the plan is we get $1.40 in earnings this year, you get the next $0.24, and then after that we get whatever is above and beyond that? And I know it’s driven off EBITDA, but that’s my interpretation of what you said, right?

Fletcher McCusker

That’s safely said if for summaries and we don’t achieve the EBITDA target then we would reverse these accruals.

Rick D’Auteuil - Columbia Management

So, if we got to EBITDA plus $5 million you get nothing - the team of 60 gets nothing?

Fletcher McCusker

That’s exactly right.

Rick D’Auteuil - Columbia Management

Okay. All right, there’s been a pending Board member change for well over a year now, what’s the status of that?

Fletcher McCusker

It’s approximately – we have been new non – in the proxy Rick, which is have been nominated by the (inaudible)

Rick D’Auteuil - Columbia Management

So I assume an outside person, right?

Fletcher McCusker

Okay.

Rick D’Auteuil - Columbia Management

Okay. And did I - I might have misheard this, but you said something about Leamon, did you hire Barclays to help you with M&A?

Fletcher McCusker

Leamon is his first name L E A M O N.

Rick D’Auteuil - Columbia Management

Oh, okay, okay. Internal, it’s a person internal, but you haven’t hired a firm to help you with your M&A?

Fletcher McCusker

No.

Rick D’Auteuil - Columbia Management

Okay. On the cash issue that was brought up by one of the earlier people, what would be the downside to being more aggressive on repaying that debt? I mean, we’ve lived through a near death experience here. And I understand now you have the cash to offset it, but if there is a negative arbitrage and doesn’t it make sense, since we’re not getting paid anything for holding cash, to pay that down? And if there’s anything, you can do the tuck-ins for sure with what you’re generating from operations, but I guess it takes off the table unless you were to go back and try to do a new financing, a large acquisition?

Fletcher McCusker

We’d like to keep Rick at least $50 million of cash to show financial strength is a bidder and if you look back at some of the bid protest part of how the big companies the multi billion dollar companies argue about our capability is that were strafed . So, one of the reasons we choose to keep cash on the balance sheet is to counter that protest ability situation in a bid environment. So, it’s important for us to show available cash, cash during non availability on a revolver its scored very differently when states score the financial section that were bid and you just saw us loose an (inaudible) bid because we did not score well in the financial section so…

Rick D’Auteuil - Columbia Management

Yes, but that was because you misfiled the paperwork or you answered the questions incorrectly. I mean, that’s not because of your current balance sheet.

Fletcher McCusker

But it when it shows you how financials are weighted. So if we had $5 million and not $50 million, we would be scored lower so its helped us prevail in a bidding environment and except for that, technical issue in Idaho we would have won that bid so keeping cash on the balance sheet is important to us, we probably never would go below $50, and pay another $10 or $15 million on debt right now, its not going to do anything for us in terms of our credit ratings its not material in terms of the interest savings but if we could use that money to diversify and do something that’s been driven by healthcare reform our return on that investment rate would be dramatically higher than the debt reduction.

Rick D’Auteuil - Columbia Management

Okay, I mean to me it doesn’t make sense. So if you went out and raised another $100 million in a debt financing you’d get a lot of credit for that because you’d have $150 million on your balance sheet in cash?

Fletcher McCusker

Yes so is that balance yes. They do score cash availability when you’re especially in a new bidding environment they want you to be able to show that you can fund the start up cost of a new proposal and they look to cash as the definitive capability to do.

Operator

Your next question comes from the line of Tyson Bauer of Wealth Monitors, Incorporated.

Tyson Bauer - Wealth Monitors, Inc.

Herman, in regards to the Idaho contract, irregardless of the financial scores, it appeared that AMR had significantly closer technical scores and maybe closing the gap in that regard. And also being within $0.02 of your PPM price that you bid, any worries there, and it seems a little counterintuitive that they were so high on the technical scores given the difference in experience.

Herman Schwarz

Couple of things to keep in mind, first of all this was the second go around at Idaho, they had to pull back their original RFP after protest were lodged and it actually in that first RFP scoring AMR beat us in price. So our bidding them in price was a function of us recognizing the fact that they are going to be trying to be very aggressive on that side of the house from a technical standpoint I guess the way I would answer it is consistent with how Fletcher has described their little literal reading of the financial statement issue, Idaho looked to access the care which is the AMR Division Inc and we believe gave them credit on experience side for AMR work not necessarily NET captivated work. So in that sense it’s little worry soon if every state’s going look at it that way, we don’t think every state will and we have significantly in the Mississippi bid that we rewon earlier this year we significantly beat them on the technique score so we continue to believe that scenario strength for us and will be able to demonstrate that in the other bids.

Tyson Bauer - Wealth Monitors, Inc.

Okay, one thing I didn’t here you mention on the rebid was Missouri, as of this morning it looks like they’re fast tracking that. So we should hear something in the next couple of weeks. Same bidder is there of course. Is that expected to be as competitive as you’ve seen or, given your incumbency, do you think you’re in a good position given the timeline here?

Herman Schwarz

It would like to -- in a normal situation I would tell you that given the timeline and the fact that they are saying that new contract closing to affect July 1 would be almost impossible for anyone but the incumbent to be the winner unfortunately this is Missouri and several of our competitors already operate in Missouri one of them is actually headquartered there and they do have brick and water in the state and probably could implement little bit faster than my if they have to build a Greenfield site. So I would like to thank that we got the -- incumbent we won this contract already once before and a rebid we believe that we’ve still got relationship with the department way to believe the fact that RP is out is political and again goes to something that be said for the factor our competitors on said that there but we are aggressive and fighting against it and we hope to be successful there.

Tyson Bauer - Wealth Monitors, Inc.

Okay. Fletcher, some of the state budgets that have been coming out in these final weeks of their sessions are not counting on federal payment in regards to filling or plugging the hole on the Medicaid side, but have instituted triggers that if federal stimulus money does come in they will restore the programs to the original plans that are currently in place. Does that open up any possibilities of holes that come after July 1 for many of these states where they’re operating without the expectations of getting that money and only at that point of receiving it they’ll reinstate the original plans as they are today?

Fletcher McCusker

There are two challenges, those things that if they want to choose that path, the largest one of course is the healthcare reform legislation. Arizona was going to in its own budgeting cycle reduced programs to children and reduced Medicaid eligibility. The new legislation, why actually prohibits that, so they have to do in a special session to reverse that, Tyson. So I think you need to be very careful about trying to make amendments to their plan that they could actually lose the additional match that has been made available to them through the healthcare reform legislation, most of the state that we talk to (inaudible) down to that issue. The stimulus thus run out in October, the President has asked that it would be extended until June and States is trying to figure out with the plans we’re going to help bridge that gap if for some reason, it doesn’t but the healthcare reform build doesn’t take into account where the money is going to come from. It basically say you cannot amend our change or effort to remain eligible for these new funds. So most of the States that we deal with have in fact stopped any term to reduce the eligibility of funding to Medicare.

Operator

Your next question is a follow up question from the line of Kevin Ellich of RBC Capital Markets.

Kevin Ellich - RBC Capital Markets

I was just wondering if Herman could give us the size of the Nebraska, Iowa and Minnesota contracts, I don’t know if you mentioned that?

Herman Schwarz

Given that there could still be baffles out there for those, Kevin I would rather to give some indication of where we set our pricing. So it’s little too early to do that.

Kevin Ellich - RBC Capital Markets

Could you even give us how many members we’d be looking at or transports or is that too much information?

Herman Schwarz

I don’t have that in front of me, so I mean we can certainly provide that to you offline.

Operator

Your next question is a follow up question from the line of Peter Park of Park West Asset Management.

Peter Park - Park West Asset Management

Hi, I’m sorry to return to this incentive comp topic. Obviously, the way that you’ve structured the incentive comp or the Board has structured it causes a lot of confusion. But I just wanted to make sure I understood one last time. So essentially if you beat the 2010 guidance by roughly $6 million on EBITDA you would essentially get all of that before shareholders see anything?

Fletcher McCusker

Well, our shareholders are going to see a $1.40 unchanged, so the incentives and I think its part to how coming like ours incentives wise people in order to achieve its guidance is triggered our budget. It is in all enough bonus you first of all have achieve your budgeted performance before anyone is eligible for our bonus and then there are levels of that based upon how much you do exceed that, they maximum amount of our bonus is $6 million. So in order for the all 60 of us better in the plan to achieve that we will have to be EBITDA by 6 million and $1 million. If we do that then indeed maximum bonus would be paid out. If we…

Peter Park - Park West Asset Management

In the maximum bonus is $6 million right?

Fletcher McCusker

That’s right.

Peter Park - Park West Asset Management

I have nothing against in certifying the teams so that’s not my point but while we appreciate transparency and we have appreciate paying employees I would suggest that the board structure incentive comp differentially because having in (inaudible) bonus for biting by $6 million what most focus on this call with consider very conservative guidance that you set up the beginning of the year. At a minimum creates a lot of confusion. Thank you.

Unidentified Company Representative

Will share those with the comp committee again we don’t set the budget we just talk about and happy to share those comments with our board and compensation committee.

Operator

And do we have no question at this time. I will now turn the call back over to Mr. Fletcher McCusker for closing remarks.

Fletcher McCusker

Thank you everyone. We are headed back east summer conference season starts here pretty soon I will be a Merrill Lynch conference. Next week and conferences in June and July as well so we are added on the road if you interested in seen us please laid us Allison at (inaudible) now we didn’t get your question today. Please call either Michael or I off line and we hope to see all soon. Thank you very much.

Operator

Thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect.

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Source: The Providence Service Corporation Q1 2010 Earnings Call Transcript
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