ModivCare Inc (MODV) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the third-quarter 2010 Providence Service Corporation earnings conference call. My name is Ann and I will be your coordinator for today's call. As a reminder, this conference is being recorded for replay purposes. At this time all participants are in listen-only mode. (Operator Instructions). We will be facilitating a question-and-answer session following the presentation.

I would now like to turn the presentation over to Alison Ziegler, from Cameron Associates. Please proceed.

Thank you, 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 third quarter ended September 30, 2010.

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 November 11. The replay number is 888-286-8010 with the pass code 34305265.

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 would 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 risk 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 recent 10-K and recent Qs. The Company's forecasts are dynamic and subject to change. Therefore, these forecasts speak only as of the date of this webcast November 4, 2010. The Company may choose from time to time to update them and if they do, we will disseminate the updates to the investing public.

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

Thank you, Allison. Good morning, everyone. Here in Tucson is Michael Deitch, our CFO; Craig Norris, our Chief Operating Officer. From Atlanta this morning, Herman Schwarz, CEO of LogistiCare.

We continue to produce record results in spite of the recession or maybe actually because of the recession. In these difficult times there is a growing need for our services to help Americans that end up on the rolls of Medicaid due to continued increases in unemployment and consequently poverty.

Our NET business is reimbursed based upon Medicaid enrollment and has now had eight record quarters beginning with Q4 of 2008. LogistiCare's business has grown approximately 55% since we acquired them in November of 2007.

LogistiCare has recently won bid awards in Michigan, in Nassau County in New York and we are awaiting the results for outsourced transportation services from South Carolina and Wisconsin. And also working on responses for bids in Arkansas, Texas, and Delaware.

As expected, Washington state stayed with its regional transportation model and local brokers. So no new outsourced business was available to us there.

We cannot talk about the Missouri NET bid as we remain in litigation with that state over what we believe was a flawed bidding process.

As money tightens due to the expiration of the federal stimulus, we continue to see state payers move away from expensive out of home care directing more business toward our home based delivery system.

With that, I will let Michael walk you through the quarter.

Thanks, Fletcher. In our third quarter of 2010, revenue totaled $217.2 million, up from $206.8 million for the third quarter of 2009, a 5% increase. Our LogistiCare subsidiary accounted for all the revenue growth for the third quarter of last year compared to the third quarter of this year.

The social services and management services segment experienced relatively unchanged although slightly lower revenue streams year-over-year.

Our third quarter operating income totaled almost $9.2 million and 4.2% of revenue as compared to almost $9.8 million and 4.7% of revenue for the third quarter of last year. Operating income for the 2010 period includes approximately $455,000 of general and administrative expense associated with the termination of a lease in Michigan and the relocation of our corporate office here in Tucson.

Our income tax rate for this quarter was 45.2% which is higher than the expected 41.5% we forecasted. This difference relates to several factors including reconciling our books with our 2009 actual tax return information, evaluating the realization of various state net operating loss carryforwards, and accounting for the ever-changing mix of state tax rates.

For those of you modeling our business and based upon consultations with our tax advisers, I am using a 41.5% estimated tax rate for Q4 2010 and for internal budgeting purposes for 2011.

Third-quarter net income was $2.9 million which translates into diluted earnings per share of $0.22. Last year in Q3, our $4.4 million reported net income included an $0.11 nonrecurring tax benefit resulting in us reporting diluted earnings per share of $0.34.

At the end of our third quarter, our accounts receivable days sales outstanding was 34 days down from 35 days. At the end of Q2, management fee DSO was 169 days at September 30, 2010, a significant improvement over 187 days at the end of Q2.

During the third quarter, we generated approximately $17.5 million in cash provided from operations. At the end of our third quarter, we had approximately $64.6 million in cash and our total debt outstanding was approximately $186 million.

With that, I will turn the call over to Craig Norris, our Chief Operating Officer.

Thank you, Michael. For the quarter, our direct client census on the social service side was over 54,000 clients an increase of over 2000 clients compared with the same quarter in 2009. In addition, we have over 8.3 million individuals eligible to receive services under our LogistiCare division, an increase of over one million eligible members compared to the same quarter in 2009.

All direct and indirect clients are being served from 439 local offices in 42 states, the District of Columbia and Canada and [by and] between our owned and managed entities, there are over 10,000 employees serving over 800 government contracts.

Overall the performance within both segments has remained mostly strong in the quarter. We do typically see some drop-off in the social service side in the summer due to school-based programs and tutoring business.

Client demand has continued to increase even though state budgets remain challenging and rates are mostly flat overall. States will continue to deal with increased demand and tighter budgets into the foreseeable future. This will certainly create some challenges but more so I believe there is going to be opportunity within these tightening environments.

Now I will turn it back over to Herman on the LogistiCare side.

Thanks, Greg. Good morning. I am pleased that the NET segment continued its positive performance in the third quarter. Our revenue growth is reflective of expansion in several of our mature contracts plus new contracts added in the last half of 2009 and the first part of this year, primarily in New York and California.

Our gross margin percent continues to show improvement compared to last year but we do expect this trend to shift as we take on lower margin business in the county-based work in New Jersey and more ASO or administrative services only and fixed cost contracts that don't take member enrollment into account.

As Fletcher mentioned, we are extremely busy responding to active RFPs right now. We were recently awarded a contract by the state of Michigan and that covers the three counties surrounding Detroit. This is an ASO type agreement and the state's first experience with a broker model. We are hopeful that this contract is an initial step in building a statewide relationship and ultimately transitioning to a capitated program. The program is scheduled to go live December 1 and we are in the midst of building the provider network and training our staff in Detroit.

We also were just awarded another ASO contract to manage the NET program for Nassau County, New York. This contract will be managed in conjunction with our existing operations in New York. Presently in New York State, a fee for service NET program is managed at the county level. So while this is not a large contract, we are excited about this win as it is our first agreement related to the state-based program. The go live is scheduled for January 1.

We have also recently submitted responses to Wisconsin and South Carolina. Wisconsin is a new outsource opportunity where the NET program is presently managed by the state while South Carolina where we currently serve four of six regions, is a rebid situation. Award dates are scheduled for November 15 for Wisconsin and November 30 for South Carolina with go lives scheduled for early 2011.

In the meantime, we are also in the process of responding to Arkansas for the eight regions we currently do not serve. To Delaware in a rebid for the statewide contract we presently manage and to Texas for the regions encompassing the Dallas and Houston markets.

In addition, we are in discussions with several managed-care organizations on opportunities that would expand our business several markets. The aggregate value of these contracts ranges from $15 million to $20 million in annual revenue.

I will now turn the call back over to Fletcher.

Thank you very much, Herman. Just a quick update on certain of our business diversification efforts that we have talked to you about and then we will take your questions.

We continue to pursue potential opportunities with the Department of Defense as it relates to introducing our home-based model for military families. We hope to have some news on our progress in this area by the end of the first quarter 2011.

We remain very interested in the senior care space. As you know, the Senate and the Department of Justice are investigating excess profits in this space and we fully expect some shake out to occur putting pressure on rates paid to and our service authorizations. We believe our margins are more comparable -- are more acceptable if you will in this space than what has historically been presented by other providers.

We believe there are attractive opportunities in this area. We will continue to diligently search for them.

If you monitor our credit ratings, you have seen that our outlook has recently been upgraded. Additionally the bank lending market remains very robust. While we cannot offer any assurances, we are exploring potential options to refinance our existing debt early in 2011 with a goal of reducing our interest rates to what we believe are currently as much as 300 basis points below our current rate of LIBOR plus 650.

With that, Ann, we will open the line for questions.

(Operator Instructions) Bob Labick, CJS Securities.

Good morning. It is actually Torin Eastburn filling in for Bob. My first question is regarding LogistiCare. Can you just talk about what the pricing and margin environment looks like for new contracts right now?

Yes. Obviously given the introduction of some additional competitors into the marketplace and the pressures on those states that are out there, we are seeing price pressure in these new bids both on the rebid and on new contracts that are out there. Some of the states have kind of taken the tact that they don't need actuarial sound ranges anymore and so they are really leaving it up to the bidders in each situation to kind of come back with a market price.

So we are experiencing a downward trend in pricing and therefore kind of a shrinkage in margins as we go forward.

Okay. And second, what are your current expectations for Medicaid spending in the second half of next year as compared to the first half?

The only reference we can point you to currently is the president's budget. The stimulus as we all know will expire in June 30 of 2011. So that is about a 20% increase over the base year 2008. The president's request for Medicaid is actually above the stimulus level. So obviously with the election results they have to work their budget through both the House and the Senate. But we remain optimistic that with the Democrats in control, that the intention is to continue to increase the Medicaid budget level. For us that has been primarily volume driven.

In some states like Nevada and others, Medicaid enrollment is up as much as 30% or 35%. As you heard in our scripted remarks, we have enjoyed about a 20% increase in Medicaid enrollment and we expect those trends to continue and of course then health-care reform will increase Medicaid enrollment by as much as a third in January of 2013.

So it is hard to identify or predict what the new federal government might do to the Medicaid budget but the current status is the president is requesting additional funds and of course, the Democrats remain in control of the Senate.

Okay. Just two more quick ones. First, did any of the governor changes do you think any of this will impact your business materially? Second, as you explore the debt refinancing, do you think you will be able to do it in a way that will allow you to repurchase shares?

The repurchase shares answer has to -- includes senior lender approval. So in our experience they typically don't allow that as long as there is debt in front of that. So I think that is unlikely. I think our current intent is to reduce that debt as rapidly as we can. As Michael said, we have almost $70 million in cash. If we do nothing between now and December 31, 75% of our free cash will be swept by the lenders to pay that debt down.

So we have the options of either voluntarily repaying that debt between now and then, doing an approved acquisition which the lenders of course have to concur with or that -- some $20 million or $25 million will prepay that debt automatically after the first of the year.

So right now I think what we said publicly is our strategy is to look for a good acquisition, use that money for that purpose. If we can't line one up, then we would likely reduce the senior debt portion of our debt and that would give us a smaller amount to refinance in 2011.

Okay, thank you.

The governor change question -- thank you, Craig. We don't expect any issues. Some of the governors, Rick Scott in Florida and others ran on kind of an anti-healthcare reform platform. I think anyone that has provided commentary since the election sees a repeal of that legislation as highly unlikely.

If you look at the history of social services legislation whether it was Medicaid or Medicare, Social Security, SCHIP, welfare, welfare reform, they were all passed by partisan Democratic congresses. None of them have either never been repealed. So we believe it is highly unlikely that that legislation will be appealed.

Most of the conversations and concern at the state levels, Arizona is one of those states, a number of other states that are trying to litigate the constitutionality of that bill are concerned about the insurance mandate portion. And I do think you may see some interesting conversations as it relates to the federal requirement now that all of us are obligated to paying healthcare insurance. And I think the argument that most attorney generals will make -- and there is just as big a turnover amongst the attorneys general as there was with the governors -- is that the federal government has no business telling private citizens whether to buy insurance or not.

So I think that is where you are going to see the challenges. We don't expect any serious challenge to the current status of Medicaid at this point. I have not heard anything from anyone that would suggest that they intend to tax the Medicaid benefit. I think in fact we see just the opposite developing so far.

Thank you.

Kevin Campbell, Avondale Partners.

Good morning. This is actually Wes Huffman filling in for Kevin. Just a few quick questions. Historically you have come in at the high end or above the guided revenue range. But the fourth quarter implies a fairly large sequential jump. So what has to happen in order for you to hit the high end of that range?

That is pretty much our budget there, Wes. Q3 is seasonal for us. All of our school contracts come back online in September and October. We are looking at LogistiCare's enrollment run rate so there is really -- that is pretty much run rate projections for us. There is very little downside to those revenue projections.

Okay, so I guess is there any way you can put a number value on the benefit you are expecting from the return of education revenues in the social services segment?

We are going to have to do this from the hip here. But I think it is $20 million -- Michael?

20-ish, 25 probably.

So we will do some more work on that for you, Wes, but that is probably $20 million or $25 million.

Okay. That is very helpful, thank you. And as it relates to the fourth-quarter earnings guidance, that implies a year-over-year decline of about $0.06 to $0.11 I think with debt approximately $20 million lower. What is causing that decline there mostly?

You're looking at Q4 guidance compared --.

Right -- '09.

I am not sure -- Michael, can you answer the question? We might have to deal with it off-line.

What would impact it the most would be the margins and social services. If you will remember in '09, we had a salary freeze for the whole year and that salary freeze -- for the whole Company -- was lifted then in this year. So that is what is putting some pressure on social services margins year-over-year.

Okay. For the quarter, what was the impact to earnings from -- was there any impact from increased incentive compensation?

Increased -- say that again, Wes.

Increased incentive compensation.

Yes, we continue to accrue the bonus. Michael, the bonus accrual for Q3 was.

Wes, we booked $1.2 million in Q3 and $1.67 million in Q2. So it is down a little as you would expect because earnings were down for Q3 and we do it on a pro rata basis.

Okay. Lastly, could you just comment a little bit on the M&A pipeline, what it looks like right now?

Our primarily M&A interest is to diversify the business and we have looked at a number that we projected for one reason or another. The reason we are sitting on cash is we still would prefer -- if you run the accretion models, Wes, of just a straight debt paydown versus an acquisition in our published ranges, an acquisition is actually a little more accretive.

Now that our debt is kind of in the 2X EBITDA range and our ratings are probably as high as they can get, we believe it is a prudent use of cash to acquire something compatible with our existing business or indeed a diversification of our existing business.

So we continue to look for those kind of tuck-in acquisitions that we are known for in states or geographies where we currently have business and/or a very serious diversification play which for us would probably be into the senior care space.

The demographics are compelling we believe at our home-based personnel. That is a business that is very similar to the way we currently do business. Our margins actually are dramatically lower than the public companies that currently operate in this space.

So part of our challenge has been we don't want to pay for these historically high EBITDA margins. So that has been part of the reason we haven't been able to close anything in the back half of the year so far. But we continue to see a number of interested parties both in the social services space and in the senior care space. Those are probably the most likely acquisition targets for us either yet this year or early in 2011.

Okay, that is it for me. Thank you very much.

Jack Sherck, SunTrust.

Thank you very much. Good morning. A question for you. I missed it, the South Carolina and Wisconsin, what was the timing on this for LogistiCare?

Wisconsin award -- and this is all estimated based on the states. They don't always stick to this obviously. But Wisconsin at least in their published timeline is scheduled to give an award on November 15 and South Carolina is scheduled on November 30. Those are the award dates and then both of them would go live sometime in early 2011.

Also, Herman, a question for you on that one just following up. What percentage of your rebids now do you think are not following the actuary sound tables or making that announcement?

Well, I can only really comment on Missouri which we just went -- that rebid was not done on an actuarial basis. Nevada, which we signed an extension on -- or not an extension but went through kind of a contract addendum this past summer, took out their actuarial review as part of that addendum. So we still have that contract, that wasn't a rebid and that is not scheduled for rebid until next summer.

So we are just kind of experiencing that as we go along. South Carolina, their rebid went away from an actuarial range and went to a fixed fee contract where you had to basically bid on a fixed amount for the life of the contract based on market conditions.

So really we are seeing it in most of the contracts as we go along. We've got a series of rebids next year, don't know exactly what they are going to do as they come out. Some of those states have historically used actuaries and we are waiting to see what will happen.

Okay. Then Craig, I think I heard you correctly. Did you say that rates were kind of flat overall in social services?

Yes, I think that is a safe comment, Jack. We have some states that we have had increases. We have some states where we have seen some rate pressure. Overall it is relatively flat but volume is up and that is kind of what we have seen in the social services space this year and pretty much what we would expect next year.

When we do see rate adjustments there, they are typically very small. So when we had enjoyed a cost of living increase, it has been a point or a point and a half so there has never been a -- rate has never been a big part of our story. It has always kind of been volume and that is really what we are seeing at present.

And a comment on the question you had regarding price and NET. It is important to remember that a low bid alone will not win these awards. Price is typically weighted as part of an overall proposal. It might be 30% or 33% of the bid. So you can't just lowball these and walk away with the business. You still have to write a technically good bid and you have to deal with the driver network and minority owned businesses, the financial strength of the bidder.

So LogistiCare continues to be a very compelling case for most of these states. We have elected not to chase a low bid and if somebody really tries to underbid this environment, our experience is that ultimately they will not be very successful. So we are not going to chase price. We may lose a bid or two if the price becomes the overriding concern. We are clearly winning our fair share of bids and we expect to in the future.

Thank you very much.

Ricky D'Auteuil, Columbia Management.

Good morning. So you mentioned Missouri and you couldn't talk about it because of litigation. I thought there was some settlement of that in this quarter. Am I mistaken on that? I thought you got some sort of monetary settlement out of it.

All I can legally tell you, Rick, is there is pending litigation. There is no settlement agreed upon by both parties. We would hope to conclude that amicably but at this juncture, we really can't comment.

So in this quarter there were no cash ramifications for gains related to any settlement. Right now you have got nothing from that?

That is correct.

And the new provider started when?

October 1 I think, Herman, right?

Correct.

So going back to the bank requirement if you don't make an acquisition which they need to approve, is it 75% of the free cash flow generated gets swept to pay down the senior?

That is exactly right and I think our free cash is probably going to be $35 million, maybe $40 million.

20 to 30. It is a complicated detailed calculation taking into account a lot of factors. So it is just not -- you just can't pick the number off any income statement or balance sheet.

We probably wouldn't let that happen, Rick. We would either voluntarily pay it down if we don't think an acquisition is going to close so we can reduce the interest expense next year or wrap that into a refinance. So either we will use that money for a good acquisition and we would probably voluntarily repay the debt.

And right now I know you said you were looking for but we are sitting here in November 4th, and even if you were to announce something right now, you're starting to push the envelope on closing it before the end of the year. So is the pipeline that active that you still might -- you feel comfortable you might have an opportunity to actually employ some of that cash in that fashion?

I wouldn't rule that out but also with a pending acquisition, we can negotiate sweep with the lenders. So if they have to approve the acquisition, they would also have to acknowledge that we are using cash to do that with.

So that can occur all the way up until literally April.

Yes, Rick, and in the computation of the excess cash flow, you do take into account acquisitions as a deduction. So it is in that complicated formula I referenced.

But they need to approve it also, right?

Right and they actually participate in the due diligence of acquisitions with us. So we probably would be fine again with an acquisition that our Board approves that we think is accretive. We don't see any resistance from them regarding our acquisition strategy.

To date have they reviewed any of the acquisitions, the banks reviewed any of the acquisitions that you were reviewing?

The bank has not turned down anything we have ever presented to them.

Okay. But they have been shown potential deals?

I don't think we had anything go that far to date.

Okay. So going to the LogistiCare side of things, you talked about the competitive environment changing and likely to see some pressure on margins. Your existing book of business rolls off over several years, right? So -- or comes up for rebid I should say. How much of your business is vulnerable to repricing over the next 12 months?

We do have a number of big contracts that will be in rebid situations next year. Our Virginia contract is due to be rebid. Our Pennsylvania contract is due to be rebid at the very end of next year and a few smaller ones. So you are talking about 30%, 35% of our revenue is probably looking at a rebid situation next year during 2011.

So we shouldn't see -- given that that rolls in -- it almost sounds like some of this is coming at the end of the year. We shouldn't see a big impact other than what you are doing on the new side?

Correct. I mean Virginia and Pennsylvania are obviously the two big ones for next year. Virginia is an October 1 date and Pennsylvania is a December 1. So from an impact into 2011 with any new pricing or impact on volume, you won't see that until the very latter stages of 2011.

It is really a 2012 impact -- (multiple speakers)

Except if we win either Texas or Wisconsin, if those are obviously lower margin points, then you will see that roll through in 2011 in terms of affecting the numbers.

No, I understand. I was just going to ask are any of those large enough to be a greater than 10% customer within your net business?

The only way -- Texas is possible if we were to win both regions which we frankly think is unlikely. We think the state will split that decision so highly unlikely.

Okay, that is all I had. Appreciate it. Thanks, good numbers.

Mike Petusky, Noble Research.

Good morning. A few of my questions have been asked and answered but okay, so Arkansas and Texas and Delaware, the timing of those at least as far as you are guessing -- I know you were still in the RFP process on those. But the timing of those I guess go lives -- is that somewhere mid-2011, something like that?

Texas, again these are all published dates and things can slip. Texas is stated to be a second quarter 2011. Delaware is also second quarter and Arkansas would be end of first quarter.

All right, great. I didn't catch this if you guys mentioned it, the timing that you are shooting for on the refinance, is that early 2011, something along those lines?

We are soliciting interest from our syndicate. We have a presentation to our Board in November so it is likely if it were to occur, it would be in Q1.

Great. Then I'm not sure you guys can answer this but I am going to give it a shot. You talk about obviously adding customers due to the expansion of Medicaid, more folks on the rolls and then you talk about market capture due to essentially your business model versus some other business models that are out there.

Is there any way to essentially say -- what we are gaining this much of it is due to the expansion of the Medicaid rolls, this is more market capture. And is there any way to think about that or is that just too hard to really get to?

If you separate the segments, it becomes easier to explain. All of the transportation increase is a direct impact of the increase in Medicaid eligible.

On the social services side particularly in a quarter like Q3, most of that would be nonorganic. That is it wasn't contractual. So there is some trend in play that is affecting the increase on the social services side.

The best we can determine, most of that is related to be trend away from out of home service towards a home-based model.

All right. Great, I think that is all I have got. Thank you.

Tyson Bauer, Wealth Monitors.

Good morning, gentlemen. Are you expecting a decision to be made from Judge Joyce in Missouri on the December 6 hearing or is that just another fact-finding hearing?

I don't think we can predict what the judge will or won't do. That is currently scheduled as a hearing only. So it could take a lengthy period of time for her to listen to and gather all the evidence and then she may actually take it under advisement. So there is really no way we can predict the outcome of that or the timing of that court date.

Are you seeing any impact obviously there is a lot of headlines regarding the need for 26 billing and to provide a Band-Aid for some of these states at midterms or their fiscal years only getting a portion of that money from the federal government. Are we seeing any step down starting at the beginning of 2011 that could have an impact on you or are those things known and you don't expect anything?

Most of our states did not expect the stimulus to pass. So most of our contracts were set around budget pricing with the assumption there would not be additional stimulus money. So we don't expect any further tightness.

It is going to be an interesting post election conversation because the Republicans made great rhetoric during the campaign about the stimulus. However, every Republican governor has requested the stimulus funds.

So it will be interesting to see how that plays out now if there is any effort on behalf of the states to request additional stimulus dollars post July. We are not planning on that and most of the state payers that we talk to are not planning on that. But most of them had dealt with the lack of stimulus in their budget planning because remember, their fiscal years started July 1.

Correct. Herman, a couple of quick questions. You mentioned 35% of your business is up for -- or possibly up for rebid in 2011. What percentage of your business is not only up for renewal but also subject to actuarial adjustments next summer? And are we seeing where you have renewal options by the states not being exercised so they can put them out for bid?

In terms of the first part of your question in terms of being adjusted by actuarials. Not that much. I think only our existing Arkansas contract which is right now in the $12 million to $15 million range and Oklahoma which is about $20 million range are the only two that have the ability to be adjusted extreme like that.

In terms of the second part of your question about the renewals -- what was the question?

A lot of your contracts actually -- you have an initial period and then they have -- are subject to many one-year renewals at the back end of the contracts. Are you seeing states not exercising or potentially not exercising those one-year renewal so they can come out and get market prices?

No, as you're very familiar with your self is Missouri is the only place we have experienced that.

Okay, so nothing from Oklahoma or anything of that nature?

Nope, nothing at all from Oklahoma in that regard.

Last comment or question if you know Fletcher, and this is from watching too many talking heads. A lot of the social services were passed by Democrats but also enacted under Democratic control. This time is a little different because you got it passed but it has yet to be enacted.

Does that throw a wrinkle in what potentially could happen or do you think it is a done deal at this point?

It is an interesting piece of legislation and dynamically we have tried to assess the election and have talked to a number of people obviously that this will impact. The funding toward healthcare reform is also part of the bill. There were trade-offs made. So it cannot go through an appropriations challenge really.

Of these Senate Healthcare Committees, which are probably the most important group of people, of the 11 that were running for office, 10 of them won. So there is very little turnover in the Healthcare Senate Finance Committee. So anything that has to occur obviously has to go through committee level first.

So again, we do not see a repeal as a likely scenario even with a Republican Congress. The president even used the word tweaks. He does expect there will be some tweaking of this legislation and some compromises probably made because it was such a partisan issue.

From what we are hearing so far again, most of that tweaking conversation appears to be on around the non-Medicaid pieces of it. The mandate that everyone carry insurance of the so-called exchanges that are being designed for the working poor that are above Medicaid eligibility, so I think you will see some compromised conversations regarding the piece of business that we do not currently engage in.

But we haven't heard any real challenges to the Medicaid piece.

Thank you, gentlemen.

Kevin Ellich, RBC Capital.

Hey, guys. Thanks for taking my questions. A lot has been talked about. On the net side of the business, just wondering what happened in Washington, any idea why they stayed brokered?

Really what happened in Washington was exactly what we expected to happen, Kevin. The third time in 10 years they have come out with an RFP and stuck with the same model they have had in Washington. They use local brokers, a lot of their county transit authorities and things like that, to take care of the different regions. They have 13 regions there.

We did submit a bid for all the regions, as well as for a statewide contract, along with all of our national competitors. And interestingly enough, all three of our other national competitors -- TMS, NTM and AMR -- or Access To Care, whichever name you want to use for them, those three were all disqualified for noncompliance with the bid submission.

We were the only one to get through. They decided to stay regional, which frankly would be very difficult for us to compete with; not just from a pricing standpoint but from a local relationship standpoint when they want to go that way. And that is not really the model that we would pursue anyway.

So we did have a debrief with the state, and basically I think from looking at the evaluations and what's out there, it is pretty clear they like having the local relationships and the local brokers. And there was really no intent to change. When we questioned them why they even put out the bid, basically they said it was because they were required to do so by CMS, not because they were really looking for anything to come out of it.

So I think the frustration as we spent a lot of time and effort, obviously, doing this and responding to all of these bids, but we did not really truly expect that they were going to do anything different based upon their history.

Understood. Do you have any other situations or states like that where they have the RFP out and you expect them to just keep it in-house or in local?

Well, Arkansas is a little bit of an odd one. We would have told you six months ago before they came out with the original RFP on these eight regions that they would have stayed, because again they are based down at the regional level and use local county relationships. They're very politically connected and ingrained in their local communities. We would have expected that the state would have stayed those providers.

We did it just to take a shot at it, protect it. And as you might recall, we won six out of the eight regions. I think that was the number, somewhere in that range. And then they pulled the bid back because of the political hue and cry. That is the bid that is now out. The original bid did not have pricing as a component of it. It was a set price and you were being evaluated based on basically the technical side, as Fletcher relayed earlier.

Now pricing is a part of it so we will see what happens there. To be honest with you, I know this is hard for everyone to understand -- every one of these things is a little unique and you never really know what is going to happen in terms of how the evaluators are going to look at it and what have you. Just to kind of give you a sense of the craziness involved.

In the answers to questions from Arkansas, it was asked by someone what happens if there is a tie between two bidders and the actual documented answer was they would decide it through a coin flip but that we were all welcome to come and watch the coin flip to determine who the winner was.

So you just never know what is going to ultimately be the decision-making process in some of these situations.

Are you kidding with the coin flip?

No, I am really not. That is in their answers to their questions.

Okay.

And there is a weighted coin if it comes down to that.

From our experience, we have seen when a state like Texas moves into this for the first time, there is usually a gubernatorial influence. There has been something to shake up the status quo either at the cabinet level or at a gubernatorial level to move the state into their brokered model.

S those states that are really reluctant to go there, there is not a lot of value in us chasing that business. We will continue to focus on those dates that do indeed want to make a change and still the majority of the states do not offer the brokered model. So that is really where the opportunities are for LogistiCare.

And that kind of dovetails with an earlier question about the gubernatorial changes and the AG changes for that matter and while obviously the impact on Medicaid reform. And what happens there still remains to be seen, we do see the shift in a lot of these states that occurred this week to be a potential positive for us in terms of moving some of these states away from their insulated kind of legacy system to a potential outsourcing.

The Republican governors, a lot of our big states are currently run by Republican governors. We have a good relationship with them and believe they are a good reference source for us. So it is our hope that as some of these new governors move in and are looking to make an impact and manage down their costs, they will consider moving to that model. That is where we are going to be focused over the next six to nine months.

Have you actually identified states under that scenario or should we just go state-by-state looking at what gubernatorial races are close switching from Democrat to Republican and vice versa?

Yes, we have identified it but I would obviously prefer not to state that publicly because we would like to be out in front of any of our competitors doing what we do. So I think if you look at the Medicaid populations that are out there and look at some of the changes -- and it is notwithstanding that we also have some states that are run by Democratic governors obviously -- Arkansas being one of them.

So we tend to believe and fundamentally believe we are a bipartisan solution. It is just a Democratic governor has been sitting there or a Republican governor has been sitting there and hasn't liked it, the switch to the other party might be an opportunity for us to get in there and convince them to make a change.

Got you. Then just kind of switching gears back to the acquisition, Fletcher. I think someone asked about home care -- wondering if you could talk a little bit about what you are looking at in valuations between home care versus the traditional social services?

The multiples are comparable, Kevin. I think the market is reduced multiple ranges from five to eight times. So there has been no real issue in terms of how they value their business. But indeed, the businesses that are currently brokered have historic EBITDAs of 20%, 24% and we believe that given what is going on with the Senate and with the Department of Justice, you are going to see some new rate-setting methodologies and new authorization processes. Something is going to come out of this to depress those margins.

We have said for 15 years year in year out, that you can't be a government contractor and produce those kind of margins and we have really tried to educate Wall Street that margin expectations are more in the 10 to 12% kind of range.

So we believe that we are very well positioned to take advantage of some of the shakeout that is going to occur in this space. Now having said that, we are not going to go pay seven times a 20% margin business only to see that margin dramatically reduced.

So that is part of the reason we passed a lot of the brokered businesses that you have seen in this space is that you are buying a historical margin that we don't think is the same.

Understood. Could you comment a little bit about the size of the deals that you are looking at? Are you looking at anything significantly -- anything significant?

We have not seen anything the scale of LogistiCare since the end of 2007. Our tuck-in businesses are $10 million kind of businesses. The space -- the senior care businesses we have looked at while there have been some of scale comparable to LogistiCare, the kind of businesses we have passed on. So it is going to be something in the $20 million to $50 million kind of range assuming we can get comfortable with the margin and the outlook.

The social services tuck-ins continue to remain very small, $5 million to $10 million, maybe $20 million books of business. $50 million would be a big deal for us in today's environment.

Got you. Thanks, guys.

Rick D'Auteuil, Columbia Management.

Just to dig down a little bit in the social service side of the business; one, can you comment on Canada? That had been a negative. I think it stabilized but maybe just a quick update there?

This is Craig, Rick. The Canada operators have mostly stabilized. We are still working through some of our arbitration issues with the Ministry and a lot of that business does come up for rebid next year which we actually think is going to be an opportunity for us because they are going to combine some of the funding streams out there. It is kind of complicated but for the most part, they are stable and we are looking toward some opportunities hopefully next year and looking to get the arbitration issue behind us hopefully by the end of the year.

By the end of 2010?

Yes.

Okay. One of the themes that you guys have said is you think you guys are the solution on the home-based care model, low-cost kind of model for the social service side. Do you see that as a driver of growth because it is hard to find the growth I guess on that part of the business. All the growth is coming on the LogistiCare side.

So what is actually going on when you dig into the detail and do you expect 2011 to be a growth year on the social service side of the business?

2011 and 2012 will be modest kind of organic growth for us because the appropriations process, Rick, actually throttles back a [three] market environment. So our growth is going to have to come through state legislatures and the federal government. So we expect kind of single-digit organic growth 9%, 10%. That is kind of what we have done year in and year out. We don't expect that to be any differently in 2011 or 2012.

The huge organic spurt is going to be 2013. Between now and then, we believe we can grow at a higher rate between new bids, as Herman suggested we are bidding in three new states now that by themselves could produce -- could double that kind of organic growth rate number. And then acquisitions, that has kind of always been the way we produce anything north of 10% organic growth.

So our expectations have not changed in that regard even given the size of the company. We expect to grow organically, we expect to be able to augment that through an acquisition or two and by winning some new contracts.

The whole senior care conversation to us is very demographically compelling. As the baby boomers age, as more people move into this category of eligibility, healthcare reform mandates home-based services, it actually has punitive measures in it for states do not adopt home-based delivery services. We believe that we are a great company to provide a solution in that space and are very interested in a diversification strategy that could double the size of our company.

Senior care is that big a market for us so that has always been our intention. We have talked about it I think consistently that we are very attracted to that space. And then all of a sudden, they started attracting some attention for their excessive profit margins. And you have seen both the Department of Justice now involved and the Senate Finance Committee and we kind of slowed down given that we expect something could come out of that that may change the profitability of that business.

But from our perspective, that is music to our ears. As you know, we are very comfortable operating at a 10% to 12% profit margins. We have very little staff turnover. We employ core staff. Most of these other existing businesses use part-time employees. So we do think, Rick, that our model is going to be very compelling. Many of these payers are the same people we deal with day in and day out in the behavior health space and in the transportation space.

So I think our customer loyalty is also quite leverageable to grow our business. And given that at $1 billion now for us to continue to grow at 20% or higher is challenging. We think a diversification is part of how we continue to produce growth rates north of that.

What is wrong with the de novo model if you have already got the relationships with the potential customers? And clearly you have a cost base model that would afford you better than average margins and still substantially lower than the competition is doing?

Again, incumbency is a huge advantage in our business. Most of the contracts in that space have been led. Some of them may come up competitively that would be a July process. So I think we might be interested in some de novo bidding activity in this.

But just to plant your flag and declare yourself in the senior care business has not been our historical strategy. We really don't want an investment spend unless we are assured there is business to follow that. So we would either try and negotiate a contract, win something competitively.

Historically our best footprint is small acquisitions and then use that to leverage the growth as opposed to a startup. So we may do some of both but to really be a game changer in that space, Rick, we think we've got to acquire some scale.

Then just as I look at the number of contracts down 21 year-over-year, my recollection was that you won 100% of your renewals. So what accounts for the difference?

On the contract renewals you're talking about, Rick? (multiple speakers) Part of the phenomenon in Q3 is the timing. It was the school-based contracts come back on, some of those will jump over to the next quarter. Some coming in at the end of this quarter. So we always have that phenomenon typically in the third quarter.

I think in terms of actual renewals, all but one renewed.

And we sometimes historically have seen where two contracts will combine into one.

That probably accounts for the difference then because there is (multiple speakers) and it is comparable periods. It is year-over-year --

I think most of that, Rick, is probably the tutoring business where that business comes in at the end of the third quarter and the beginning of the fourth quarter and there is some crossover profits that goes on.

Thank you again.

Jack Sherck, SunTrust.

Thank you very much. Just a quick question about the client services expense. It seemed to tick up more than usual even given the seasonality in the education business. Anything going on there?

Nothing other than what we have talked about with respect to the salary freeze that was lifted this year as opposed to last year.

That's probably it entirely, Jack. Remember through all of '09, we had no salary increases. We were attritioning positions. This year obviously we are not. So I think that's probably the change in margin.

Okay. So that is more of a run rate then?

Yes.

Thank you.

Mike Petusky, Noble Research.

Thanks. Just a quick clarification. When you guys are talking about senior care, I have heard the term home care used and when I think of home care, I think primarily of more like the residential care model where they send a $10 an hour folks in and help with bathing and that sort of thing as opposed to the home health where I'm thinking more like a Medicis.

When you guys are talking about this, you are primarily talking about home health type deals that you are looking at or a combination?

A combination I think. We are not prejudicing ourselves in any of that space. There are a number of levels that operate with home delivery from skilled nursing to rehab to social services to the kind of services you have described. We think the appropriate response is some mix of that business.

So again, it is compatible with our mission. It is compatible with our historical strategy and we think ultimately the margins will be comparable.

Okay. Then just a quick follow-up, Fletcher, I think you were referring more to the social services side when you said incumbencies is big in your business. But I guess I just wanted to ask Herman in terms of I guess Virginia that will be coming up next year and Pennsylvania, how much does incumbency in your history with the states matter in a rebid particularly sizable pieces of the business? I mean how much weight should we give that?

Well, I mean the mix on pricing to technical usually ranges anywhere from price begins at 30% -- 25% to 30% of 50%. So being the incumbent in some cases, that can hurt you because you almost know too much and you know what the actual cost to serve is. So from a standpoint on the technical side, every state does it a little bit differently, Mike. You would like to think that our client, the Medicaid agency typically gets -- is always involved and gets put in our reference. And if we are doing a good job, get positives.

But in some cases they choose procurement not to even involve the Medicaid agency and make it completely neutral in which case we get the benefit of saying we have the experience in that state and that should help in some respects but just don't know. We would like to think it helps because we do know the state and we know these stakeholders in the state. And we try to work to get them to help support us and we have obviously political connections and what have you.

But it is hard for me to answer that because every state is differently. Obviously in the decision -- not talking about the legal element of it, but just the decision in Missouri, it didn't help us there. We got beat there and we would have liked to have thought that our incumbency would have helped and that the agency wasn't involved at all in providing a reference to the evaluators. So in that case, it really didn't help us at all.

What about Virginia because you guys are -- and maybe this doesn't really matter -- but you are active on both sides of the business in the state of Virginia. So I would think there is a very good relationship in general. Can you speak to Virginia specifically at all?

The appropriate answer to that question particularly in a competitive bid is that incumbency should not matter. It should be a nonfactor. The state is obligated to look at all bidders in the same fashion. They use many times outside independent evaluators that have no relationship with the company. That is different on the social services side where we typically don't bid in a competitive environment.

The one thing that I think helps our transportation division may not be the incumbency in that state but the overall experience we have in delivering the business. Every proposal we have seen does give some score to the bidders' experience in the space. So not necessarily in that state but generally overall as a provider of services.

So that is really the only advantage an incumbency should have for us in a competitive environment is that we have a history of delivering this service. And I think we have scored the maximum of the proposals that have been released publicly recently. We scored the maximum number of scores as it relates to our experience, our design and other technical pieces of the bid.

So incumbency really shouldn't matter on a transportation side other than some subjective thing that we probably can't identify for you.

That is very helpful. Thanks, guys.

Kevin Ellich, RBC Capital.

Just had a couple of financial questions. One, I was wondering what caused the big uptick in CapEx and where that should go? And then also had a question about -- actually I'll let you answer the CapEx question first.

Kevin, of the $4.2 million -- almost of fixed asset increases for the quarter, we acquired a property for the new corporate headquarters in downtown Tucson. We are relocating our IT there. It is going to be an IT center for the country. Over time we will save some significant rent from this purchase and that was $3.2 million.

Not likely to reoccur. I think Kevin for the first time in 15 years, we elected to use some of our cash to acquire property. I think everyone knows that we recently relocated in May to downtown Tucson, Arizona. It is an urban revitalization area under sales tax revenue incentives. Unisource, the other public company here in Tucson is also building its headquarters in downtown Tucson.

So it created an opportunity for us to acquire some adjacent distressed property. And as Michael suggested in doing that and by relocating our IT here, we actually will dramatically reduce our rent over time. But we did bite the bullet and acquired that adjacent property. We don't expect to do that going forward.

Got you. And then, Michael, just wondering, I don't think anyone asked or you might not have said how much debt do you plan to pay down? Could you give us any color on that front?

If I had to do it today, I would say about $30,000,000.

Is that over the next 12 months or next --?

No, I'm sorry, Kevin, that would be just the extra. We pay I think about $3 million a quarter thereabouts.

Okay. So $3 million and then $30 million on top of that next quarter you plan to pay down?

I don't have a plan for it right now to make that excess payment. I am just saying if it was today and that is what we were going to do, that would be the approximate number.

If we don't make an acquisition, Kevin, that is probably what we would do is reduce that senior -- and that would go to a senior debt reduction. So between normal and next year and some sort of voluntary repayment, we could reduce that debt somewhere in the neighborhood of $40 million. Today I think our senior debt, Michael, is about 118, 120 something like that. So we can continue to dramatically reduce the senior debt.

Got you. Okay, thanks, guys.

Ladies and gentlemen, that does conclude our question-and-answer session today. I would now like to turn the call back over to Mr. Fletcher McCusker for closing remarks.

Ann, thank you very much. Thank you everyone, good questions all the way around. If we didn't get to something, please call Mike or Craig or I in the office. I am headed Sunday to the mid-Atlantic. So if you are in Minneapolis, Milwaukee or Chicago and would like to visit with us if you haven't heard from us already, please call Alison at Cameron Associates.

And we also expect a very busy spring at a number of conferences in January and February. So we will see you all soon and again, if you didn't get a question answered, please call us directly. Thank you very much.

Ladies and gentlemen, we thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a good day.