Item 2.
|
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
|
The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes for the three months ended March 31, 2016 and 2015, as well as our consolidated financial statements and accompanying notes and management’s discussion and analysis of financial condition and results of operations included in our Form 10-K for the year ended December 31, 2015. For purposes of “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” references to Q1 2016 and Q1 2015 mean the three months ended March 31, 2016 and the three months ended March 31, 2015, respectively.
Overview of our business
The Providence Service Corporation is a holding company that owns and manages diverse operating subsidiaries, comprised of providers of healthcare and workforce development services to a variety of end markets. Our operations currently are organized into three principal business segments: NET Services, WD Services, and HA Services.
Critical accounting estimates
and policies
As of March 31, 2016, there has been no change in our critical accounting policies. For further discussion of our critical accounting policies see management’s discussion and analysis of financial condition and results of operations contained in our Form 10-K for the year ended December 31, 2015.
Results of operations
Segment reporting.
Our operations are organized and reviewed by management along our segment lines, which are: NET Services, WD Services, and HA Services. Effective November 1, 2015, we completed the sale of our Human Services segment. The Human Services segment results of operations are separately discussed in the “Discontinued operations, net of tax”, section set forth below.
Segment results are based on how our chief operating decision maker manages our business, makes operating decisions and evaluates operating performance. The operating results of the segments include revenue and expenses incurred by the segment, as well as an allocation of direct expenses incurred by our corporate division on behalf of the segment. Indirect expenses, including unallocated corporate functions and expenses, such as executive, finance, human resources, information technology and legal, as well as the results of our captive insurance company (the “Captive”) and elimination entries recorded in consolidation are reflected in Corporate and Other.
Consolidated Results
.
The following table sets forth results of operations and the percentage of consolidated total revenues represented by items in our unaudited condensed consolidated statements of income for Q1 2016 and Q1 2015 (in thousands):
|
|
Three months ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
$
|
|
|
Percentage
of Revenue
|
|
|
|
$
|
|
|
Percentage
of Revenue
|
|
Service revenue, net
|
|
|
432,650
|
|
|
|
100.0
|
%
|
|
|
419,829
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service expense
|
|
|
386,488
|
|
|
|
89.3
|
%
|
|
|
366,537
|
|
|
|
87.3
|
%
|
General and administrative expense
|
|
|
19,172
|
|
|
|
4.4
|
%
|
|
|
19,466
|
|
|
|
4.6
|
%
|
Depreciation and amortization
|
|
|
14,336
|
|
|
|
3.3
|
%
|
|
|
13,053
|
|
|
|
3.1
|
%
|
Total operating expenses
|
|
|
419,996
|
|
|
|
97.1
|
%
|
|
|
399,056
|
|
|
|
95.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
12,654
|
|
|
|
2.9
|
%
|
|
|
20,773
|
|
|
|
4.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-operating expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
3,635
|
|
|
|
0.8
|
%
|
|
|
5,195
|
|
|
|
1.2
|
%
|
Equity in net loss of investee
|
|
|
2,717
|
|
|
|
0.6
|
%
|
|
|
2,483
|
|
|
|
0.6
|
%
|
Loss (gain) on foreign currency transactions
|
|
|
(75
|
)
|
|
|
0.0
|
%
|
|
|
319
|
|
|
|
0.1
|
%
|
Income from continuing operations before
income taxes
|
|
|
6,377
|
|
|
|
1.5
|
%
|
|
|
12,776
|
|
|
|
3.0
|
%
|
Provision for income taxes
|
|
|
4,248
|
|
|
|
1.0
|
%
|
|
|
6,921
|
|
|
|
1.6
|
%
|
Income from continuing operations, net of tax
|
|
|
2,129
|
|
|
|
0.5
|
%
|
|
|
5,855
|
|
|
|
1.4
|
%
|
Discontinued operations, net of tax
|
|
|
-
|
|
|
|
0.0
|
%
|
|
|
394
|
|
|
|
0.1
|
%
|
Net income
|
|
|
2,129
|
|
|
|
0.5
|
%
|
|
|
6,249
|
|
|
|
1.5
|
%
|
Net loss (income) attributable to noncontrolling interest
|
|
|
106
|
|
|
|
0.0
|
%
|
|
|
(12
|
)
|
|
|
0.0
|
%
|
Net income attributable to Providence
|
|
|
2,235
|
|
|
|
0.5
|
%
|
|
|
6,237
|
|
|
|
1.5
|
%
|
Service revenue, net.
Consolidated service revenue, net for Q1 2016 increased $12.8 million, or 3.1%, compared to Q1 2015. Revenue for Q1 2016 compared to Q1 2015 includes an increase in revenue attributable to NET Services of approximately $36.2 million. This increase in revenue was partially offset by a decrease in revenue attributable to WD Services of approximately $16.6 million and a decrease in revenue of HA Services of approximately $6.8 million.
Total operating expenses.
Consolidated operating expenses for Q1 2016 increased $20.9 million, or 5.2%, compared to Q1 2015. Operating expenses for Q1 2016 compared to Q1 2015 included an increase in expenses attributable to NET Services of approximately $38.7 million. This increase in operating expenses was partially offset by a decrease in operating expenses of WD Services of approximately $11.7 million, a decrease in operating expenses of HA Services of approximately $4.7 million and a decrease in operating expenses of Corporate and Other of approximately $1.4 million.
Operating income.
Consolidated operating income for Q1 2016 decreased approximately $8.1 million, or 39.1%, compared to Q1 2015. The decrease was primarily attributable to decreases in operating income in Q1 2016 as compared to Q1 2015 of WD Services of approximately $4.9 million, NET Services of $2.4 million and HA Services of $2.2 million. These decreases were partially offset by a decrease in Corporate and Other operating loss of approximately $1.4 million.
Interest expense, net.
Consolidated interest expense, net for Q1 2016 decreased approximately $1.6 million, or 30.0%, compared to Q1 2015. The decrease was primarily related to a decrease in long-term obligations from $505.4 million at March 31, 2015 to $312.2 million at March 31, 2016, due to the repayment of debt in conjunction with the sale of the Human Services segment in November 2015.
Equity in net loss of investee
.
Equity in net loss of investee relates to our investment in Mission Providence. Mission Providence began providing services in July 2015. We record 75% of Mission Providence’s profit or loss.
Loss (gain)
on foreign currency trans
actions
.
The foreign currency gain of $0.1 million and loss of $0.3 million for Q1 2016 and Q1 2015, respectively, were primarily due to translation adjustments of our foreign subsidiaries.
Provision for income taxes.
Our effective tax rate from continuing operations for Q1 2016 and Q1 2015 was 66.6% and 54.2%, respectively. The effective tax rate exceeded the United States federal statutory rate of 35% for these periods primarily due to foreign net operating losses (including equity investment losses) for which the future income tax benefit currently cannot be recognized, significant losses in foreign jurisdictions with tax rates lower than the US rate of 35%, state income taxes, and certain non-deductible expenses such as amortization of deferred consideration related to acquisitions.
Discontinued operations, net of tax.
The following table summarizes the major classes of line items included in income from discontinued operations, net of tax, and the percentage of service revenue from discontinued operations, for Q1 2015 (in thousands):
|
|
Three months ended March 31, 2015
|
|
|
|
|
$
|
|
|
Percentage of
Revenue
|
|
Service revenue, net
|
|
|
85,966
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Service expense
|
|
|
77,319
|
|
|
|
89.9
|
%
|
General and administrative expense
|
|
|
5,218
|
|
|
|
6.1
|
%
|
Depreciation and amortization
|
|
|
1,847
|
|
|
|
2.1
|
%
|
Interest expense, net
|
|
|
812
|
|
|
|
0.9
|
%
|
Income from discontinued operations
before provision for income taxes
|
|
|
770
|
|
|
|
0.9
|
%
|
Provision for income taxes
|
|
|
376
|
|
|
|
0.4
|
%
|
Discontinued operations, net of tax
|
|
|
394
|
|
|
|
0.5
|
%
|
The results above include an allocation of interest expense related to 50% of the net proceeds from the sale of the Human Services segment, which was required to be repaid by the lenders under the terms of the Company’s credit facility.
Net loss (income) attributable
to noncontrolling interests.
We have minority interests, some of which are in companies that are currently experiencing losses due to start-up costs. As such we have a net loss attributable to noncontrolling interests.
Segment Results.
The following analysis includes discussion of each of our segments.
NET Services
NET Services segment financial results are as follows for Q1 2016 and Q1 2015 (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
$
|
|
|
Percentage of Revenue
|
|
|
|
$
|
|
|
Percentage of Revenue
|
|
Service revenue, net
|
|
|
290,984
|
|
|
|
100.0%
|
|
|
|
254,760
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service expense
|
|
|
266,969
|
|
|
|
91.7%
|
|
|
|
229,247
|
|
|
|
90.0%
|
|
General and administrative expense
|
|
|
2,837
|
|
|
|
1.0%
|
|
|
|
2,497
|
|
|
|
1.0%
|
|
Depreciation and amortization
|
|
|
2,877
|
|
|
|
1.0%
|
|
|
|
2,277
|
|
|
|
0.9%
|
|
Operating income
|
|
|
18,301
|
|
|
|
6.3%
|
|
|
|
20,739
|
|
|
|
8.1%
|
|
Service revenue, net.
Services revenue, net for Q1 2016 increased $36.2 million, or 14.2%, compared to Q1 2015. The increase was primarily related to the full quarter impact of new contracts that commenced in 2015 in Florida, California, and Texas; increased membership under existing contracts in Florida, California, Michigan and Pennsylvania; and higher rates in certain existing markets.
Service expense, net
.
Service expense for our NET Services segment included the following for Q1 2016 and Q1 2015 (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
$
|
|
|
Percentage of Revenue
|
|
|
|
$
|
|
|
Percentage of Revenue
|
|
Purchased services
|
|
|
217,329
|
|
|
|
74.7%
|
|
|
|
186,650
|
|
|
|
73.3%
|
|
Payroll and related costs
|
|
|
40,582
|
|
|
|
13.9%
|
|
|
|
33,713
|
|
|
|
13.2%
|
|
Other operating expenses
|
|
|
8,976
|
|
|
|
3.1%
|
|
|
|
8,554
|
|
|
|
3.4%
|
|
Stock-based compensation
|
|
|
82
|
|
|
|
0.0%
|
|
|
|
330
|
|
|
|
0.1%
|
|
Total service expense
|
|
|
266,969
|
|
|
|
91.7%
|
|
|
|
229,247
|
|
|
|
90.0%
|
|
Service expense for Q1 2016 increased $37.7 million, or 16.5%, compared to Q1 2015. The increase in service expense was primarily attributable to an increase in purchased transportation services due primarily to higher volume. Purchased transportation services as a percentage of revenue increased slightly, primarily as a result of an increase in utilization amongst Medicaid expansion and other members. Additionally, our payroll and related costs increased for Q1 2016 as compared to Q1 2015 primarily due to the hiring of additional executive management members to support growth and operational initiatives and the hiring of other employees to support new contracts and increased call volume associated with increased utilization, and a long-term incentive plan for management put into place in the fourth quarter of 2015. Our other operating expenses also increased in Q1 2016 as compared to Q1 2015 due to volume, although they decreased slightly as a percentage of revenue.
General and administrative expense.
General and administrative expenses in Q1 2016 increased $0.3 million, or 13.6%, as compared to Q1 2015, due to increased facility costs resulting from the overall growth of our operations. As a percentage of revenue, general and administrative expense remained constant at approximately 1.0%.
Depreciation and amortization expense.
Depreciation and amortization expenses increased approximately $0.6 million primarily due to the addition of long-lived assets in our expanded call centers. As a percentage of revenue, depreciation and amortization increased slightly from 0.9% for Q1 2015 to 1.0% for Q1 2016.
WD Services
WD Services segment financial results are as follows for Q1 2016 and Q1 2015 (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
Percentage of
Revenue
|
|
|
$
|
|
|
Percentage of
Revenue
|
|
Service revenue, net
|
|
|
91,043
|
|
|
|
100.0%
|
|
|
|
107,618
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service expense
|
|
|
81,672
|
|
|
|
89.7%
|
|
|
|
94,232
|
|
|
|
87.6%
|
|
General and administrative expense
|
|
|
7,871
|
|
|
|
8.6%
|
|
|
|
7,225
|
|
|
|
6.7%
|
|
Depreciation and amortization
|
|
|
3,579
|
|
|
|
3.9%
|
|
|
|
3,316
|
|
|
|
3.1%
|
|
Operating income (loss)
|
|
|
(2,079
|
)
|
|
|
-2.3%
|
|
|
|
2,845
|
|
|
|
2.6%
|
|
Service revenue, net.
Service revenue, net in Q1 2016 decreased $16.6 million, or 15.4%, compared to Q1 2015. The decrease in Q1 2016 compared to Q1 2015 was primarily related to revenue declines associated with declining referrals and an altered pricing structure under the segment’s primary employability program in the United Kingdom.
Service expense
.
Service expense for our WD Services segment included the following for Q1 2016 and Q1 2015 (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
Percentage of
Revenue
|
|
|
$
|
|
|
Percentage of
Revenue
|
|
Payroll and related costs
|
|
|
56,879
|
|
|
|
62.5%
|
|
|
|
66,562
|
|
|
|
61.9%
|
|
Purchased services
|
|
|
14,494
|
|
|
|
15.9%
|
|
|
|
16,194
|
|
|
|
15.0%
|
|
Other operating expenses
|
|
|
10,267
|
|
|
|
11.3%
|
|
|
|
9,904
|
|
|
|
9.2%
|
|
Stock-based compensation
|
|
|
32
|
|
|
|
0.0%
|
|
|
|
1,572
|
|
|
|
1.5%
|
|
Total service expense
|
|
|
81,672
|
|
|
|
89.7%
|
|
|
|
94,232
|
|
|
|
87.6%
|
|
Service expense in Q1 2016 decreased $12.6 million, or 13.3%, compared to Q1 2015. Payroll and related costs decreased primarily as a result of decreased headcount associated with declining referrals under WD Services’ primary employability program. Partially offsetting these decreases was increased payroll and related costs associated with a significant new offender rehabilitation program that began in 2015 and approximately $1.2 million in termination benefits primarily related to two redundancy plans designed to better align headcount with service delivery volumes and new information technology systems. Stock-based compensation decreased approximately $1.5 million in Q1 2016 as compared to Q1 2015 due to the settlement of outstanding awards in the fourth quarter of 2015 in relation to the separation of two executives.
General and administrative expense.
General and administrative expense in Q1 2016 increased $0.6 million compared to Q1 2015 due to facility costs related to the growth associated with our new programs.
Depreciation and amortization expense.
Depreciation and amortization expense for Q1 2016 increased approximately $0.3 million compared to Q1 2015.
HA Services
HA Services segment financial results are as follows for Q1 2016 and Q1 2015 (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
Percentage of
Revenue
|
|
|
$
|
|
|
Percentage of
Revenue
|
|
Service revenue, net
|
|
|
50,592
|
|
|
|
100.0%
|
|
|
|
57,432
|
|
|
|
100.0%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service expense
|
|
|
37,790
|
|
|
|
74.7%
|
|
|
|
43,213
|
|
|
|
75.2%
|
|
General and administrative expense
|
|
|
656
|
|
|
|
1.3%
|
|
|
|
523
|
|
|
|
0.9%
|
|
Depreciation and amortization
|
|
|
7,796
|
|
|
|
15.4%
|
|
|
|
7,182
|
|
|
|
12.5%
|
|
Operating income
|
|
|
4,350
|
|
|
|
8.6%
|
|
|
|
6,514
|
|
|
|
11.3%
|
|
Service revenue, net.
HA Services revenue in Q1 2016 decreased $6.8 million, or 11.9%, as compared to Q1 2015. The decrease was primarily attributable to decreased volume specifically related to one large customer that reduced their volume commitment for 2016 versus 2015, as well as a slight decline in pricing. Partially offsetting this decrease was an increase in volume by other customers.
Service expense
.
Service expense for our HA Services segment included the following for Q1 2016 and Q1 2015 (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
Percentage of
Revenue
|
|
|
$
|
|
|
Percentage of
Revenue
|
|
Payroll and related costs
|
|
|
31,903
|
|
|
|
63.1%
|
|
|
|
35,112
|
|
|
|
61.1%
|
|
Purchased services
|
|
|
308
|
|
|
|
0.6%
|
|
|
|
227
|
|
|
|
0.4%
|
|
Other operating expenses
|
|
|
5,557
|
|
|
|
11.0%
|
|
|
|
7,864
|
|
|
|
13.7%
|
|
Stock-based compensation
|
|
|
22
|
|
|
|
0.0%
|
|
|
|
10
|
|
|
|
0.0%
|
|
Total service expense
|
|
|
37,790
|
|
|
|
74.7%
|
|
|
|
43,213
|
|
|
|
75.2%
|
|
Service expense in Q1 2016 decreased $5.4 million, or 12.5%, compared to Q1 2015 due primarily to decreased headcount and other costs directly associated with comprehensive health assessment (“CHA”) volume, partially offset by increased expense related to a long-term incentive plan for management put into place in the fourth quarter of 2015.
General and administrative expense.
General and administrative expense in Q1 2016 increased $0.1 million, compared to Q1 2015 due to increased facility costs.
Depreciation and amortization expense.
Depreciation and amortization expense in Q1 2016 increased $0.6 million, or 8.5%, compared to Q1 2015. Depreciation and amortization includes approximately $6.5 million of amortization of intangible assets for Q1 2016 and Q1 2015.
Corporate and Other
Corporate and Other includes the headcount and professional service costs incurred at the holding company level, at the Captive, and elimination entries to account for inter-segment transactions. Corporate and Other financial results are as follows for Q1 2016 and Q1 2015 (in thousands):
|
|
Three Months Ended March 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
$
|
|
|
$
|
|
Service revenue, net
|
|
|
31
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
Service expense (a)
|
|
|
57
|
|
|
|
(155
|
)
|
General and administrative expense
|
|
|
7,808
|
|
|
|
9,221
|
|
Depreciation and amortization
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84
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278
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Operating loss
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(7,918
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)
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(9,325
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)
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(a)
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Negative amounts are present for this line item due to elimination
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entries that are included in Corporate and Other. Offsetting amounts
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are reflected in the finanical results of our operating segments.
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Operating loss.
Corporate and Other operating loss in Q1 2016 decreased by approximately $1.4 million, or 15.1%, as compared to Q1 2015, primarily due to decreases in cash settled stock-based compensation expense of approximately $1.3 million. Additional decreases in general and administrative expenses related to various items, including insurance costs and share settled stock-based compensation expense. Partially offsetting these decreases were costs resulting from the sale of our Human Services segment, including bonuses approved in 2016 of approximately $1.0 million and contract termination fees of $0.2 million, as well as increased legal fees.
S
easonality
Our quarterly operating results and operating cash flows normally fluctuate due in part to seasonal factors and uneven demand for services and the timing of new contracts, which impact the amount of revenues earned and expenses incurred. NET Services experiences fluctuations in demand during the summer, winter and holiday seasons. Due to higher demand in the summer months, lower demand during the winter and holiday seasons, and a primarily fixed revenue stream based on a per member, per month payment structure, NET Services normally experiences lower operating margins during the summer season and higher operating margins during the winter and holiday seasons. HA Services has historically, with the exception of the year ended December 31, 2015, experienced higher volumes in the second half of the calendar year. WD Services is impacted by both the timing of commencement and expiration of major contracts. Under many of WD Services’ contracts in new service lines, we invest significant sums of money in personnel, leased office space, purchased or developed technology, and other costs, and generally incur these costs prior to commencing services and receiving payments. This results in significant variability in financial performance and cash flows between quarters and for comparative periods. It is expected that future contracts will be structured in a similar fashion.
Liquidity and capital resources
Short-term capital requirements consist primarily of recurring operating expenses, new contract start-up costs, including workforce restructuring costs, commitments to fund investments, and debt service requirements. We expect to meet these requirements through available cash on hand, cash generated from our operating segments, and borrowing capacity under our revolving credit facility.
Cash flow from operating activities was our primary source of cash in Q1 2016. Our balance of cash and cash equivalents was $95.2 million and $84.8 million at March 31, 2016 and December 31, 2015, respectively, including $38.1 million and $37.5 million held in foreign countries, respectively. Such cash held in foreign countries is generally used to fund foreign operations, although it may be used also to repay intercompany indebtedness existing between Providence and its foreign subsidiaries. In addition, we had restricted cash of $17.5 million and $20.1 million at March 31, 2016 and December 31, 2015, respectively, primarily related to contractual obligations and activities of our captive insurance subsidiary. At March 31, 2016 and December 31, 2015, our total debt was $312.2 million and $305.0 million, respectively.
We may, from time to time, access capital markets to raise equity or debt financing for various business reasons, including required debt payments and acquisitions. The timing, term, size, and pricing of any such financing will depend on investor interest and market conditions, and there can be no assurance that we will be able to obtain any such financing.
Cash flows
Operating activities.
We generated net cash flows from operating activities of $34.6 million for Q1 2016. These cash flows included net income of $2.1 million. Non-cash items included $8.8 million of amortization expense, $5.5 million of depreciation expense, $0.6 million in stock-based compensation expense, and $2.7 million in equity in net loss of investee. In addition, we made income tax payments of approximately $28.3 million in relation to the sale of our Human Services segment. Changes in working capital items include the following significant items:
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$19.9 million source of cash due to the increase in accrued transportation costs of NET Services. This increase was primarily related to increased volume and unit costs of transportation services.
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$22.5 million source of cash due to the decrease in accounts receivable, the majority of which is due to a decrease in NET Services’ accounts receivable of $21.8 million due primarily to timing of collections for two significant customer balances.
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Investing activities.
Net cash used in investing activities totaled $10.5 million for Q1 2016. During the quarter, $9.8 million of cash was used to purchase property and equipment primarily related to information technology purchases to support the growth of our operating segments, and $3.2 million was used to fund our equity investment in Mission Providence. These cash outflows were partially offset by a decrease in the restricted cash of the Captive of approximately $2.5 million.
Financing activities.
Net cash used in financing activities totaled $13.2 million for Q1 2016. During the quarter, we borrowed $15.0 million under our revolving credit facility during Q1 2016 and paid scheduled term loan payments of $7.8 million. During the quarter, cash paid for common stock repurchases pursuant to our $70.0 million stock repurchase program totaled $19.5 million and we paid convertible preferred stock dividends of $1.1 million.
Obligations
and commitments
Credit facility.
We are party to a credit agreement with Bank of America, N.A., as administrative agent, swing line lender and letter of credit issuer, and the other lenders party thereto. The credit agreement provides us with senior secured credit facilities, which consisted of the following at March 31, 2016:
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$60.0 million term loan subject to quarterly amortization payments, which commenced on December 31, 2014, so that the following percentages of the term loan outstanding on the closing date are repaid as follows: 7.5% between December 31, 2014 and September 30, 2015, 10.0% between December 31, 2015 and September 30, 2016, 12.5% between December 31, 2016 and September 30, 2017, 15.0% between December 31, 2017 and June 30, 2018 and the remaining balance on August 2, 2018. At March 31, 2016, $52.5 million was outstanding.
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$250.0 million term loan subject to quarterly amortization payments, which commenced on March 31, 2015, so that the following percentages of the term loan outstanding on the closing date are repaid as follows: 7.5% between March 31, 2015 and December 31, 2015, 10.0% between March 31, 2016 and December 31, 2016, 12.5% between March 31, 2017 and December 31, 2017, 15.0% between March 31, 2018 and June 30, 2018 and the remaining balance on August 2, 2018. At March 31, 2016, $225.0 million was outstanding.
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$240.0 million revolving credit facility, including a subfacility of $25 million for letters of credit. As of March 31, 2016, we had $34.7 million of borrowings and eight letters of credit in the amount of approximately $7.3 million outstanding under the revolving credit facility. At March 31, 2016, our available credit under the revolving credit facility was $198.0 million.
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The credit facility matures on August 2, 2018.
Interest on the outstanding principal amount of the loans accrues, at our election, at a per annum rate equal to LIBOR, plus an applicable margin or the base rate plus an applicable margin. The applicable margin ranges from 2.25% to 3.25% in the case of LIBOR loans and 1.25% to 2.25% in the case of the base rate loans, in each case, based on our consolidated leverage ratio as defined in the credit agreement. The interest rate applied to our term loan at March 31, 2016 was 3.36%. In addition, we are obligated to pay a quarterly commitment fee based on a percentage of the unused portion of each lender’s commitment under the revolving credit facility and quarterly letter of credit fees based on a percentage of the maximum amount available to be drawn under each outstanding letter of credit. The commitment fee and letter of credit fee range from 0.25% to 0.50% and 2.25% to 3.25%, respectively, in each case, based on our consolidated leverage ratio.
Our obligations under the credit facilities are guaranteed by substantially all of our present and future wholly owned domestic subsidiaries, excluding certain domestic subsidiaries, which includes our insurance captives. Our obligations under, and each guarantor’s obligations under its guaranty of, the credit facilities are secured by a first priority lien on substantially all of our respective assets, including a pledge of 100% of the issued and outstanding stock of our domestic subsidiaries, excluding our insurance captives, and 65% of the issued and outstanding stock of our first tier foreign subsidiaries.
The credit agreement contains customary affirmative and negative covenants and events of default. The negative covenants include restrictions on our ability to, among other things, incur additional indebtedness, create liens, make investments, give guarantees, pay dividends, sell assets, and merge and consolidate. We are subject to financial covenants, including consolidated net leverage and consolidated fixed charge covenants. We were in compliance with all covenants as of March 31, 2016.
Rights offering.
We completed a Rights Offering, on February 5, 2015 (the “Rights Offering”) allowing all of the Company’s existing common stock holders the non-transferrable right to purchase their pro rata share of $65.5 million of convertible preferred stock at a price equal to $100.00 per share. The convertible preferred stock is convertible into shares of our common stock at a conversion price equal to $39.88, which was the closing price of our common stock on the NASDAQ Global Select Market on October 22, 2014.
Stockholders exercised subscription rights to purchase 130,884 shares of the Company's convertible preferred stock. Pursuant to the terms and conditions of the Standby Purchase Agreement between Coliseum Capital Partners, L.P., Coliseum Capital Partners II, L.P., Coliseum Capital Co-Invest, L.P. and Blackwell Partners, LLC (collectively, the "Standby Purchasers") and the Company, the remaining 524,116 shares of the Company's preferred stock was purchased by Standby Purchasers at the $100.00 per share subscription price. The Standby Purchasers beneficially owned approximately 94% of our outstanding convertible preferred stock after giving effect to the Rights Offering and the Standby Purchase Agreement. The Company received $65.5 million in aggregate gross proceeds from the consummation of the Rights Offering and Standby Purchase Agreement, which it used to repay the related party unsecured subordinated bridge note that was outstanding as of December 31, 2014.
Additionally, on March 12, 2015, the Standby Purchasers exercised their right to purchase an additional 150,000 shares of the Company’s convertible preferred stock at a $105.00 per share subscription price.
We may pay a noncumulative cash dividend on each share of convertible preferred stock, when, as and if declared by our board of directors, at the rate of five and one-half percent (5.5%) per annum on the liquidation preference then in effect. Following the issue date of the convertible preferred stock, on or before the third business day immediately preceding each fiscal quarter, we will determine our intention whether or not to pay a cash dividend with respect to that ensuing quarter and will give notice of our intention to each holder of convertible preferred stock as soon as practicable thereafter.
In the event we do not declare and pay a cash dividend, the liquidation preference will be increased to an amount equal to the liquidation preference in effect at the start of the applicable dividend period, plus an amount equal to such then applicable liquidation preference multiplied by eight and one-half percent (8.5%) per annum, computed on the basis of a 365-day year and the actual number of days elapsed from the start of the applicable dividend period to the applicable date of determination.
Cash dividends are payable quarterly in arrears on January 1, April 1, July 1 and October 1 of each year and commenced on the first calendar day of the first January, April, July or October following the date of original issuance of the convertible preferred stock, and, if declared, will begin to accrue on the first day of the applicable dividend period. Paid in kind (“PIK”) dividends, if applicable, will accrue and be cumulative on the same schedule as set forth above for cash dividends and will also be compounded at the applicable annual rate on each applicable subsequent dividend date. PIK dividends are paid upon the occurrence of a liquidation event, conversion or redemption in accordance with the terms of the convertible preferred stock. Cash dividends were declared for the quarter ended March 31, 2016 and totaled approximately $1.1 million.
Contingent obligations.
We maintain a 409(A) Deferred Compensation Rabbi Trust Plan for highly compensated employees of our NET Services operating segment. Benefits are paid from our general assets under this plan.
Reinsurance and Self-Funded Insurance Programs
Reinsurance
We reinsure a substantial portion of our automobile, general and professional liability and workers’ compensation costs under reinsurance programs through our wholly-owned captive insurance subsidiary, Social Services Providers Captive Insurance Company, or SPCIC. At March 31, 2016, the cumulative reserve for expected losses since inception of these automobile, general and professional liability and workers’ compensation costs reinsurance programs was approximately $1.5 million, $2.6 million and $9.0 million, respectively. In addition, based on an independent actuarial report, our expected losses related to workers’ compensation and general and professional liability in excess of our liability under our associated reinsurance programs at March 31, 2016 was approximately $7.2 million. Further, SPCIC had restricted cash of approximately $16.8 million and $19.5 million at March 31, 2016 and December 31, 2015, respectively, which was restricted to secure the reinsured claims losses of SPCIC under the automobile, general and professional liability and workers’ compensation reinsurance programs.
Health Insurance
We offer our NET Services’, HA Services’, certain WD Services’ and corporate employees an option to participate in a self-funded health insurance program. The liability for the self-funded health plan of approximately $1.9 million and $2.4 million as of March 31, 2016 and December 31, 2015, respectively, was recorded in “Reinsurance liability and related reserve” in our condensed consolidated balance sheets.
Off-Balance Sheet Arrangements
There have been no material changes to the Off-Balance Sheet Arrangements discussion previously disclosed in our audited consolidated financial statements contained
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.
Forward-Looking Statements
Certain statements contained in this quarterly report on Form 10-Q, such as any statements about our confidence, strategies or expectations about revenues, liabilities, results of operations, cash flows, ability to fund operations, profitability, ability to meet financial covenants, contracts or market opportunities, constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements are based on our current expectations, assumptions, estimates and projections about our business and our industry. You can identify forward-looking statements by the use of words such as “may,” “should,” “will,” “could,” “estimates,” “predicts,” “potential,” “continue,” “anticipates,” “believes,” “plans,” “expects,” “future,” and “intends” and similar expressions which are intended to identify forward-looking statements.
The forward-looking statements contained herein are not guarantees of our future performance and are subject to a number of known and unknown risks, uncertainties and other factors disclosed in our annual report on Form 10-K for the year ended December 31, 2015. Some of these risks, uncertainties and other factors are beyond our control and difficult to predict and could cause our actual results or achievements to differ materially from those expressed, implied or forecasted in the forward-looking statements.
All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained above and throughout this report. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made. We do not intend to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise, except as otherwise required by law.