ModivCare Inc (MODV) 2010 Q1 法說會逐字稿

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 a 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 will now turn the presentation over to Alison Ziegler of Cameron Associates.

Thanks, Grace Ann. 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'd 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 249-14-056. The 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 financial 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 forecasts 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, we'll 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.

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 as always, we'll all be available for your questions following our scripted remarks.

We are coming off the most amazing quarter we've 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.

Not 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 a maintenance of efforts section that requires states to maintain their Medicaid plans at stimulus levels established by the February 2009 Medicaid stimulus legislation. This has caused 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 pro-beneficiary rulings. We are seeing a new round of litigation as a number of Republican led states have actually sued the federal government over the mandates in the Health Care Reform bill. This pro-Medicaid spending environment is certainly partisan, but so was the initial legislation adopted in the 1960s.

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

News on a couple of other fronts -- we did when the arbitration in Canada and British Columbia, the $3 million and change dollars that were recouped there will be returned to us. That will not affect our earnings but it's good news in terms of our situation in Canada.

And on the LogistiCare front, we had a very interesting situation develop in Idaho where basically our proposal was disqualified when the State of Idaho gave LogistiCare a zero score due to their financial section -- historical financial section being presented under the name Charter LCI which was the holding company when Charterhouse owned LogistiCare before we acquired them. Otherwise they would have won that bid, but were essentially viewed as non-responsive.

All this basically to provide a backdrop for you in reviewing our 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. I'll let Michael walk you through the particulars of the quarter. Mike?

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, an 18.3% increase. All of 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 operation which is increasing its home-based services as part of its efforts to offset its reduction in foster care services.

Management fee revenue declined by 8.3% due to renegotiated management services contracts since a year ago and an operational restructuring at one of the managed entities.

Transportation services revenue grew by 30.5% 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 with $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 with 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 with $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 statement. The computation results from the affect 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 the 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 of 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 days sales outstanding was 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 fund ongoing operations. And with that I'll turn the call over to Craig Norris, our COO.

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 had close 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 are being served from 430 local offices in 43 states, the District of Columbia and Canada. Combined between our own 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 side as well managed 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 juggling program priorities and funding initiatives. However, as Fletcher mentioned, the stimulus funding and Health Care 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 prepare for our continued client demand and enrollment within both segments of the operations.

I'm pleased with how we started 2010; the operations continue to 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.

Thanks, Craig, and good morning, everyone. Given 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 in transportation expense.

Our gross margin percent, which was budgeted to remained basically flat, in fact improved by nearly 2 points in the first quarter. This improvement can be primarily attributed to the positive impact that 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 in 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. While a portion of these trips do ultimately get run in subsequent weeks, those trips associated with adult day care or mental health services are permanently canceled and therefore do not generate an 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 variance is a function of a delayed investment in human resources. While we won't fill all of the roles 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 awaiting 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 a competitor. We continue to grow our presence with managed-care programs and are implementing a few smaller contracts worth $3 million to $5 million during the summer months.

In general I'm pleased with our first-quarter performance and commend our management teams for their diligent focused on maintaining efficient operations in the face of 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 introduce Leamon Crooms to give you a brief update.

Thank you, Herman. Let me first start by saying that I'm happy to be a part of the team, especially on this side of Health Care Reform and during what promises to be an exciting time for Providence. My role is to further develop and drive our strategy as we look to capitalize on developing growth opportunities.

Areas of opportunity for Providence exist with a continued focus on our vision -- helping those who are most in need by delivering human services without walls. We view several opportunities as significant for us that deliver the same or very similar services to new payer client segments. And we're working on strategic initiatives in the following areas -- services to seniors which is a market that is 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 services for active military and vets and redirect attention 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 year 2000.

And of course Health Care Reform, which is expected to increase Medicaid rules by adding 16 million new recipients, deliver mental health parity that will put attention and financial focus on mental and behavioral health services as a part of the 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 healthcare to 20 million new low income patients.

As we work through our strategic initiative process we will be identifying and acting upon opportunities that align with our strategy. To that end we are currently engaged in a number of activities that we expect to yield results. For example, we are working with each state on a business marketing plan to bolster our organic growth and our pull-through across service lines.

We are identifying and aligning ourselves with industry specialists to increase the effectiveness of our strategic decisions. We are meeting with and targeting M&A ties 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.

Leamon, thank you very much. As you can see, this is a remarkable time for us -- we've not only survived the 2008 recession, but are thriving today and in a position to play offense 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 positioned to take advantage of Health Care Reform.

We have guided up for the remainder of the year, basically picking up our Q1 earnings, anticipating the accrual of our 60 person deep bonus plan, and staying on budget for the rest of the year. This guidance assumes no new contract wins nor new acquisitions. And with that, Grace Ann, we'll open the line for questions.

(Operator Instructions). Bob Labick, 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?

Sure. In 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 [BAFOs] or decisions. Minnesota was supposed to have already been out, but as is customary in these situations, decisions usually get delayed and we don't get any more information until they decide to give it to us.

So basically in all three cases we're now waiting to see what happens. And hopefully we'll get a positive indication and immediately move into implementation mode.

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

Those are rebids. We're the incumbent in Delaware; we have the entire state in Delaware. And Connecticut, we split 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're still actively providing services up there.

All right, great, thanks. And 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 likely targets and any further color on the area that you could give?

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're in a position now where we can fund some of those kinds of acquisitions for cash. We have a number that we are in conversations with and would expect to be able to close something in either Q3 or 4.

Well, that's all I've got. I'm going to jump back in queue. Thank you.

Thanks.

Kevin Campbell, Avondale Partners.

Hi, good morning, thanks for taking my question. 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 base -- 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?

What we have done, Wes, is basically stay with our budget. Remember our states fiscal year is July 1, so we really haven't heard anything yet from them definitively to give us any indication on how to change what we 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 of what they would be in Q2. So, you will have probably a pretty routine Q2 for us, a dramatic drop in earnings in Q3, and then based upon the contract renewal we should have a pretty good Q4.

So, we'll have further information on those out quarters as we renew our contracts. But for the moment we're assuming that we achieve our budgeted results that will trigger the bonus plan that we've also guided to -- the $0.16 that we mentioned will be accrued over the remaining three quarters.

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?

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

Okay. 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?

Again the summer we see a dip primarily due to the school-based programs. So you'll see a dip in the summer certainty. I suspect you'll continue to see some incremental growth with the exception of the dipping in the summer because of our school programs.

There are two things that have affected that quite dramatically over the last year, Wes, none of which of course is Medicaid enrollment. And that was driven to a large extent by the recession. The latest unemployment numbers indicate that that is leveling off, so we would expect Medicaid enrollment to stabilize until the Health Care Reform initiatives kick in.

As we mentioned, some states will early adopt that so there will still be some enrollment or eligibility drivers. But moreover what we're seeing is a dramatic shift in referral patterns moving away from these expensive out of home programs like residential treatment and psychiatric hospital care that favor us. So we would expect other than the summer seasonality that we would continue to see census pick up through 2010.

Okay, that's very helpful. And just another question -- or the first question on LogistiCare as it relates to utilization. If it 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?

Wes, let me jump in there. I can tell you what it is, what we have budgeted for the year. EBITDA margins of 7.7%, operating income margins of 6.4%. Now obviously due to the seasonality they'll be a little higher in Q1 and Q2 and lower in Q3 as Fletcher has suggested.

Okay.

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

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

And that's pretty much what we've guided to, Wes, for the remainder of the year.

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?

It's about $0.44 -- $0.43 to $0.44. When you get above that it triggers the converts being dilutive.

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

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 is the amount that you guys are paying out lower than it was last quarter when -- I thought you guys indicated it wouldn't be above $0.39 or did that include other -- payment increases for other employees?

Good question, Kevin. Our bonus plan is triggered by -- it's 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 by 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 of this early in the year. But given that unbelievable performance we've begun to accrue for that starting in Q1. I think we accrued about $0.08, Michael, in Q1 and then another $0.16, Kevin, for the remainder of the year. So the total cost of the bonus plan is about $0.25 on an earnings per share basis.

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.

These are non-budgeted incentive programs, so we may be talking about two different things total.

Okay.

So, what was not budgeted and is based upon company performance is the $0.25 bonus we just talked about.

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.

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 weather versus personal savings. But the two things that affected that were weather and some attrition on personnel. Herman, do you have any additional information?

Yes, I mean -- Kevin, if you're referring to seasonality as the weather, I would tell you that about 25% to 40% of the pickup was weather-related in the markets where it hit. And it's obviously a hard thing to predict because if we get hurricanes in the summer months we'll get some pickup down in Florida and along the East Coast. And then depending on weather patterns in the fourth quarter you might get some early snow.

So the weather is obviously unpredictable. We just happened to have a really bad -- or good depending on how you look at it -- first quarter in a lot of our markets. So we had some markets, for instance, Delaware where we basically couldn't 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 weren't allowed on the road. So when that happens we don't incur any expense. And under a capitated program that goes primarily to our benefit.

I might add, Kevin, that it's really the opposite on the social service side. The weather will -- in fact, in Virginia it can have a dramatic impact on our fee-for-service business. So, it's sort of one end of the other side when we have bad weather.

Right. So I guess it's (multiple speakers).

Kevin, the way we model that is to try and not anticipate it obviously. So I think if you model the business on our historical margins, then the impact of weather is typically favorable to that.

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?

Correct.

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

Right.

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

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.

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

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

Yes, we have budgeted for same -- what you would call same-store growth, Kevin, in the single digits, high single digits.

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

Well, 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 that are modeling our business are not looking at is we will barely earn any money in Q3. So you drop from a $0.40 quarter to a single-digit quarter and that's really the impact of the summer seasonality.

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 space. Thanks.

On the rate issue, we have some anxiety about rates given the predicament our states are in. However, in reality we're not seeing the kind of rate pressure that the out-of-home providers have announced. We think there are two things that affect that. One is that we tend to be the low end of the system so states that want to incentivize us to increase our volume are not going to beat us up about rate.

And on the other hand, any state that's attempted to cut rates, California namely, North Carolina chiefly, have been sued. So state bureaucrats 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 court and the ACLU prepared to intervene if someone arbitrarily tries to reduce rates in the social services space. And the carrot of course is the matching program in the Health Care Reform legislation.

So, we haven't seen any state, other than those two so far, trying to dramatically attack rates across the board. Now we would expect that we will not enjoy significant rate increases, but at the same token we're not seeing significant rate pressure.

Got it. And then the acquisitions, homecare?

We have pipeline activity, we have retained an adviser, it's probably too early to tell you how far along we are in any of that space. It's the new business to us so we have a lot to learn as we look to diversify the Company. But part of the reason Leamon is onboard and we're communicating our intent is that we're very excited about how reform affects home-based care, particularly for seniors, and we're very enthusiastic about the opportunities that are being 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 de novo and also to try and target an acquisition into either one of those spaces.

Got it. Thanks, guys.

Brandon Osten, Venator Capital.

Hey, guys. Obviously a great quarter, I think you know that. Just wanted to ask you a bit -- 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?

Great question. We got asked it a lot. The smaller niche acquisitions, the kind of tuck-in acquisitions that we're known for we can probably fund with internal cash. Anything that's big and sexy obviously would require cash we don't currently have which would have to be financed through some sort of vehicle.

We have passed on any kind of just straight up debt swap; the high yield markets remain very robust. However, from our perspective there's not a lot of incentives, our value to our shareholders 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've watched us, both the rating agencies have recently upgraded as, that was part of what 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're watching interest rates, we continue to talk to our syndicate, which remains very supportive of the Company and could engage in a refinance, particularly if we needed the use of proceeds to fund any kind of acquisition. So, for the moment our attitude is watching the market, waiting and seeing, not rushing into any kind of refi.

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 to cut some of that interest cost in the interim?

We have prepaid quite aggressively over the last year and do into 2010. When you look at the value of an acquisition versus a debt reduction the accretion is about the same. We paid our debt down aggressively to get into the three times range, and I think we said publicly in the past that once we got there we likely probably would not be as aggressive with the debt pay down.

So that cash for us now serves two purposes. One, it strengthens the Company as a bidder when states look at our balance sheet and wherewithal in terms of executing on our proposal. And it's dry powder for our acquisition strategy that would be accretive without having to go to the finance markets.

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. Was that -- 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?

It was an unbelievably unique situation. We have always provided historical financial statements, there typically is not an issue when there's a holding company involved, 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 of the -- name that was on the audit did not match the name of the bidder and therefore we're giving you a score of zero.

We've never seen it since and I think it's easy for us to fix. Had we known it was going to be an issue we would have just had the auditors issue the historical audits in the name of the bidding entity. So that's the first time we've ever seen it occur and, again, it's highly irregular and unbelievably literal in its interpretation of historical presentation.

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

It's an easy fix, yes. Now that we know it's potentially an issue we can have the audits reissued.

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, how much the executive bonuses are eating out of 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?

It's a really sharp question. The bonus accrual is at our maximum plan. So we are assuming that we will trigger the maximum amount under our current performance levels. So the $0.16 that we've guided for in the remainder of the year would be our maximum exposure to bonus. And it's deeper than an executive and officer bonus, it literally is the top 60 people in the Company.

We like being transparent about that, we debated whether or not we should begin to accrue it this early. But it's pretty obvious to us that it's going to be earned. We think it helps the shareholders understand the changes expected in the year rather than just throwing it all into Q4. So, it's a $6 million program, that's the maximum exposure.

Great, thanks a lot, guys.

[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.

It's an EBITDA threshold plus the accrual. So in other words, we have to beat EBITDA by more than $6 million.

And what is the actual EBITDA number?

It's a non-GAAP number so I don't think we've disclose it. But if you look at EPS, basically we have to beat our earnings by the tax effect of the accrual. So, $6 million tax effect.

So is it that -- so without talking about EBITDA, is it that you had to beat your EPS guidance range (multiple speakers)?

We don't use EPS as the trigger. But the impact is the same once you tax effect the bonus. Our comp committee looks at EBITDA as the trigger and EBITDA plus the accrual has to be achieved before the bonus is paid. And it's a team bonus; it's an all or nothing bonus. So we have to not only beat plan, we have to beat play plus the accrual before it gets paid.

And this is typically paid in the spring of the following year. So even though we're accruing this there's been no checks written obviously to anybody. And one of the reasons we like this is in the event something were to happen and we do not achieve the bonus we have an accrual that can be reversed in the out quarters.

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

Absolutely. Yes, our budget is developed in the field approved by the Board; EBITDA is calculated from op income less D&A. It produces the same EPS. Our Street guidance and internal budget are in fact the same.

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

All right, good.

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?

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

There were two or three things, Rick, that affected that. The arrangement fee and amendment fees with the bank this time last year and then the cost of the proxy fight and it was between right around $2.5 million to $3 million.

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. There was no -- 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?

That's a 2009 bonus number, Rick. That was the actual bonuses paid and accrued in the year 2009. So there's no overhang impact from that bonus. They were all booked last year. This is the bonus plan for 2010 and is triggered by year-end 2010 results which would be audited and payable in April of 2011. So all we're doing is acknowledging that it's likely we're going to trip those triggers. And rather than accruing it all in the fourth quarter as we did last year, we're picking it up on a quarterly basis.

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."

Right, they're apples and oranges. That is the re-initiation of the stock comp which will begin for us in Q's three and four. And the termination of the salary freeze which benefited us in 2009. The impact of those savings was the $0.39 in 2009 which will not occur in 2010. So, I think you're just mixing up the two programs. The $0.39 savings that produced part of our 2009 results came from a year-long salary freeze and a year of no stock compensation.

Right, I understand that --.

And both of those will be reintroduced and were included in our $1.35 guidance. Now that's how we went from $1.60 to $1.35.

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

Right. And salaries at their new level.

Including senior management salaries?

Yes.

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

We'd have to go look. And that's in an 8-K because officers obviously have to disclose our new base. But we all got new bases January 1.

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 --?

No, the lion's share of it in fact is due to the salary freeze. We can break this out for you off-line --.

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?

That's safely said. If for some reason we do not achieve the EBITDA targets then we would reverse these accruals.

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

That's exactly right.

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

Is the proxy out?

The proxy's out.

The proxy is out. Yes, we have a new nominee in the proxy, Rick, which has been nominated by the [nomin gov] to replace Craig Norris.

So I assume an outside person, right?

Yes.

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 or --?

Leamon is his first name, L-e-a-m-o-n.

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

No.

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's a negative arbitrage 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 refinance -- a new financing, a large acquisition?

We like to keep, Rick, at least $50 million of cash to show financial strength as a bidder. And if you look back at some of the bid protests, part of how the big companies, the multibillion-dollar companies argue about our capability is that we're strapped. 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 strength, not availability on a revolver. It's scored very differently when states score the financial section of a bid. And you just saw us lose an Idaho bid because we did not score well in the financial section. So that's the primary reason (multiple speakers).

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.

No, but it shows you how financials are weighted. So if we had $5 million and not $50 million we would be scored lower. So it's helped us prevail in the 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 million.

And paying another $10 million or $15 million on debt right now is not going to do anything for us in terms of our credit ratings, it's not material in terms of the interest savings, but if we could use that money to diversify into something that's being driven by Health Care Reform our return on that investment, Rick, would be dramatically higher than the debt reduction.

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?

As silly as that sounds, yes. They do score cash availability when you're -- especially in a new bidding environment. They went you to be able to show that you can fund the startup costs of a new proposal. And they look to cash as the definitive capability to do that.

Okay, thank you.

Tyson Bauer, Wealth Monitors, Inc.

Good morning, gentlemen, and great quarter.

Tyson, thanks.

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.

Well, let me -- a couple things to keep in mind. First of all, this was the second go round at Idaho. This was -- they had had to pull back their original RFP after protests were lodged. And actually in that first RFP scoring AMR beat us in price. So, our beating 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 literal reading of the financial statement issue. Idaho looked to access to care, which is the AMR divisioning, and we believe gave them credit on the experience side for AMR work not necessarily NET capitated work.

So, in that sense it's a little worrisome if every state is going to look at it that way, we don't think that every state will. And we have significantly, in the Mississippi bid that we re-won earlier this year, we significantly beat them on the technical score. So we continue to believe that that's an area of strength for us and we'll be able to demonstrate that in the other bids.

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 bidders 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?

Well, you'd like to -- in a normal situation I would tell you that given a timeline and the fact that they are saying that the new contract goes into affect July 1, it 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 mortar in the state and probably could implement a little bit faster than they might if they had to build a greenfield site.

So, I'd like to think that we've got the advantage because we're the incumbent, we've won this contract already once before in a rebid. We believe that we've still got the relationship with the department. We do believe that the fact that the RFP is out is political and, again, goes to something to be said for the fact that our competitor's home state is there. But we are aggressive and fighting against it and we hope to be successful there.

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?

There are two challenges to the states if they want to choose that path, the largest one of course is the Health Care Reform legislation. Arizona was going to, in its own budgeting cycle, reduce programs to children and reduce Medicaid eligibility. The new legislation law actually prohibits that. So they had to in a special session reverse that, Tyson.

So I think states need to be very careful about trying to make amendments to their plan, that they could actually lose the additional match that's being made available to them through the Health Care Reform legislation. Most of the states that we talk to are very tuned in to that issue.

The stimulus does run out in October. The President has asked that it be extended until June and states are trying to figure out if the Feds are going to help bridge that gap if for some reason it doesn't. But the Health Care Reform bill doesn't take into account where the money is going to come from. It basically says you cannot amend or change your effort to remain eligible for these new funds. So, most of the states that we deal with have in fact stopped any attempt to reduce the eligibility or funding to Medicaid.

Okay, thanks a lot, gentlemen.

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 he mentioned that?

Given that there could still be BAFOs out there for those, Kevin, I'd rather not, because that would give some indication of where we set our pricing. So it's a little too early to do that.

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

I don't have that in front of me. We could certainly provide that to you off line.

Okay, that's it. Thanks.

[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?

No, shareholders are going to see $1.40 and change. So the incentives, and I think it's part of how a company like ours incentivizes people in order to achieve its guidance, is triggered by our budget. It's an all or nothing bonus. You, first of all, hove to achieve your budgeted performance before anyone is eligible for a bonus. And then there are levels of that based upon how much you do exceed that. The maximum amount of our bonus is $6 million. So in order for all 60 of us that are in the plan to achieve that we would have to beat EBITDA by $6,000,001.

Right, and then (multiple speakers)?

And if we do that then indeed the maximum bonus would be paid out. If we (multiple speakers).

And the maximum bonus is $6 million, right?

That's right.

And I have nothing against incentivizing the team, so that's not my point. But while we appreciate transparency and we appreciate paying employees, I would suggest that the Board structure incentive comp differently. Because having an all or none bonus for beating by $6 million what most folks on this call would consider very conservative guidance that you set at the beginning of the year, at a minimum creates a lot of confusion. Thank you.

We'll share those with the comp committee. Again, we don't set the budget, we just talk about it. And I'm happy to share those comments with our Board and compensation committee.

Thank you.

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

Thank you, everyone. We are headed back east; Summer conference season starts here pretty soon. I'll be at the BofA-Merrill Lynch conference next week and conferences in June and July as well. So we'll be out on the road. If you're interested in seeing us, please let us or Allison and Cameron know. If we didn't get to your question today, please call either Michael and I off line and we hope to see you all soon. Thank you very much.

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect.