ModivCare Inc (MODV) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Q4 2010 Providence Service Corporation earnings conference call. My name is Steve and I will be your operator for today. At this time, all participants are in a listen-only mode. We will conduct a question-and-answer session towards the end of today's call. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes. I would like to turn the conference over to Ms. Alison Ziegler with Cameron Associates. Please proceed, ma'am.

Thank you. Good morning. everyone and thank you for joining us this morning for the Providence conference call and webcast to discuss the financial results for the fourth quarter and year-end December 31, 2010. You should have all received a copy of the press release last night. If you would like to be added to an e-mail list, please call Cameron Associates at 212-554-5469.

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 March 17. The replay number is 888-286-8010 with the passcode 62631529.

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 2011 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 upcoming 10-K.

The Company's forecasts are dynamic and subject to change. Therefore, these forecasts speak only as of the date of this webcast, March 10, 2011. 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 very much, Alison. As usual here in Tucson are Craig Norris, are Chief Operating Officer and Michael Deitch, our Chief Financial Officer. Also on the phone from Atlanta is Herman Schwarz, the CEO of LogistiCare. We will all be available for your questions following our initial remarks.

This is a truly remarkable time for our Company. Our services have never been more topical and more needed. We benefited last year from the unbelievable record Medicaid enrollment increases, particularly with the addition of the recently unemployed. Consequently, LogistiCare has produced record revenue and record margins. The Social Services side flattened a bit over a record 2009 census, but we expect both segments to grow in 2011.

The Nonemergency Transportation segment recently won the Delaware rebid and won the newly outsourced Wisconsin contract, bringing our recent win rate to five of eight of the last competitive NET bids.

We have engaged two members of our current banking syndicate to refinance our senior debt and take advantage of the debt market of about 300 basis points under our current rate. We will voluntarily reduce our senior debt to $100 million, which will make our senior debt leverage approximately 1.5 times.

We continue to look for the right diversification opportunities in both the DoD and senior care space throughout 2011. I believe most of you know we are awaiting word on the Texas outsourcing of nonemergency transportation and have heard additional states will likely privatize their Medicaid transportation in 2011.

As state budgets tighten and federal stimulus dollars dry up midyear, our two products have become front and center for states that want to reduce costs. Health and Human Services' Secretary Sebelius recently wrote to the nation's governors reminding them that nearly 65% of the Medicaid dollar is still spent in out-of-home care and that they should be aggressively reallocating funds to home-based delivery. She offered to help states in that effort and agreed that the federal government will pay 90% match for new community-based efforts versus the typical 60% match.

The repeal of the Healthcare Reform Act failed in the US Senate. That legislation will mandate that states develop additional community-based services. We are going to briefly discuss last year and then focus most of our call on our 2011 guidance. I will turn it over to Michael to go through the year.

Thanks, Fletcher. Revenue for the fourth quarter totaled almost $219.3 million, up from $215.6 million for the fourth quarter of 2009. For the fourth quarter 2010 compared to the fourth quarter of last year, home and community-based revenue declined by 2.5%, primarily due to a revenue decline in our Virginia operation, especially for December 2010. There was a great deal of snow in Virginia this past December, which adversely affected revenue in our Virginia school-based programs.

Foster care revenue decreased 10.5%, due primarily to changes in authorized levels of care related to our Tennessee operations. Management fees increased 5.5%, transportation services revenue grew 4.8%.

For the 2010 calendar year, revenue totaled almost $879.7 million, up from $801 million in 2009. For the year 2010, home and community-based revenue grew 1.3%, foster care revenue declined 4.7%, again, primarily due to changes in authorized levels of care related to our Tennessee operations. Management fees decreased 5.6%, transportation services grew 16.8%.

Our fourth-quarter 2010 operating income totaled $11.2 million, or 5.1% of revenue. Last year, our 2009 fourth-quarter operating income totaled $14.9 million and 6.9% of revenue. For the 2010 year, operating income was $57.3 million, or 6.5% of revenue. For the 2009 year, operating income was $53.7 million, or 6.7% of revenue.

For the fourth quarter of 2010, net income totaled $4.3 million, which was 2% of revenue and translates into $0.33 per diluted share. For the 2010 year, net income totaled $23.6 million, which was 2.7% of revenue and resulted in $1.78 per diluted share.

For the analysts modeling our business for the 2011 year, we expect general and administrative expense to be between 5% and 5.5%, consistent with historical amounts and we expect an effective income tax rate of 42.5%.

At the end of our fourth quarter, our days receivable -- our accounts receivable days sales outstanding improved 32 days from 34 days last quarter. During 2010, we generated approximately $44 million in cash provided by operations and we have repaid almost $22 million in debt during the year. At the end of our fourth quarter, we had approximately $61 million in cash with nothing drawn on our revolving line of credit facility. With that, I will turn the call over to Craig Norris, our COO.

Thanks, Michael. For the quarter, our direct client census on the Social Service side was over 58,000 clients. This is a decrease from the prior-year quarter of approximately 4000 clients. The reduction primarily reflects the impact of lower census at our workforce development division, including opting out of a poorly funded job-training contract rebid.

We had over 8.2 million individuals eligible to receive services under our LogistiCare division, an increase of over 500,000 eligible members compared to the same quarter in 2009. All direct and indirect clients are being served from 435 local offices in 43 states, the District of Columbia and Canada. Combined between our owned and managed entities, there are over 10,000 employees serving 982 government contracts.

Overall, the performance within both segments has remained mostly strong in the quarter. Although, as Michael said, Social Services did have some impact related to weather in December and the quarter on the East Coast.

As I have said before, state budgets do remain challenging. Rates are mostly flat overall and states will continue to deal with increased demand and tighter budgets into the foreseeable future. There are certainly challenges in these markets, but I believe opportunity for marketshare is also growing. We are involved at all levels of state government to promote our abilities and resources in these tight markets. Thank you and I will hand off to Herman for more information on LogistiCare.

Thank you, Craig. We are clearly pleased with the 2010 performance of the NET segment. While increased Medicaid membership and many programs was a key factor in the success, I also want to state that it was a big function of the tremendous effort put forth by our 1300 associates, our local management teams and our corporate support departments who all focused on managing our cost of transportation, providing quality efficient customer service and controlling our overhead expense during the year.

The fourth quarter specifically, as you heard, LogistiCare experienced revenue growth of 4.8% over the same quarter in 2009 and this was in spite of the loss of our Missouri contract for that entire quarter. Our gross margin percent for the fourth quarter was favorably impacted by a strong December and showed slight improvement compared to last year and the third quarter.

We do expect our margins to moderate as we go forward as we absorb new programs in Michigan and Wisconsin and face increased price competition in the rebid situation scheduled for later in the year. We went live in Michigan at the first of the year and we experienced the typical startup challenges faced when going from a state managed fee for service environment to a broker managed program. But I can say, for the most part, we have resolved any outstanding issues.

We are now working closely with our new Wisconsin client to prepare for the go live of our statewide program on July 1. Our RFP work continues to stay active as we are awaiting to hear on our submitted Pennsylvania rebid and are preparing our response to the Virginia RFP, which was released last week.

We continue to talk with several states regarding their budget concerns and are pushing them to consider the broker model as a potential solution to managing NET costs. I will now turn the call back over to Fletcher.

Herman, thank you very much and congratulations on an unbelievable year. To remind people, our NET segment has grown its revenue from 2008 to 2010 by 41%. That has just been an extraordinary opportunity for the Company.

We want to spend some time talking to you obviously about 2011. It is an important tri-party message that has a number of different constituents. The biggest challenge we have always had with margin and margin expectations frankly has been Wall Street and you are getting a good dose of that from us today.

For those of you that are new to our story, this Company has a legacy of managing profit expectations. It is part of what we believe endears us to our payers and part and parcel to the reason that we have virtually no contract renewal issues and are very competitive in new bid situations.

As we have said several times over the last several months, we believe 2010 to be an untoppable year for us as it relates to margins. That was primarily driven by the increases in Medicaid enrollment, which were driven by recessionary economics. If you follow those trends, you will notice that, for the first time in two years, the country is now net positive for jobs in January. That is the first time we have seen that statistics in two years.

You also notice that LogistiCare's enrollment, Medicaid enrollment is off a few hundred thousand enrollees. We believe, therefore, that the Medicaid enrollment will begin to level off and stabilize. It will, therefore, make it easier for us to manage to our margin expectations.

For those of you that model our business, we will budget each segment to produce an 8.5% EBITDA margin. That is a little better historically for LogistiCare, but we believe again very manageable and very acceptable to our payer constituents.

To our payer audiences, they appreciate the fact that we continue to manage margins. This has not always been the case in the outsourced sector and there are a number of home healthcare companies today that have overpromoted their margin capabilities to you and are paying for it at Congress and the Department of Justice and with a number of their payer constituents. We will always maintain our discipline around margins on behalf of our payers.

Now having said that, that is probably the biggest bogey between your models for '11 and what we released yesterday. So I will take a few minutes to provide you with some high-level assumptions that should allow you to bridge the two years and then we can work with any of you off-line to help you come to a more specific model for 2011.

As you heard from Craig and Herman, we do expect revenue to be up. In spite of what you hear and read in the paper regarding Medicaid and State budgets and healthcare reform, our business bias is up. We like the leverage we have with Medicaid. We like the fact that we are typically identified as part of a cost-saving mechanism of state agencies and state budget issues. So we expect our revenue to be up about $40 million, a roughly 5% growth.

At those 8.5% margins, that will produce about $3.5 million of additional pretax. We will not budget for the bonuses that were paid in 2010 because with the extraordinary year, you will remember that we actually began to accrue executive and management bonuses in February of last year. That is about a $4 million item. That will not be budgeted in 2011.

So on the plus side, you have about $7.5 million of improvements to your model. The 2% reduction in margin that Herman discussed on NET is off of their entire segment revenue, or about $550 million. So on the negative side, you need to anticipate about $11 million swing to operating income for NET, which will bring those margins in line with the 8.5% that we have just recently told you. That is about a $3.5 million negative swing if you combine those two bridge items.

As Michael said, we are having an unexpected increase in our tax rate, primarily driven by increased revenue in states that have higher state tax rates. That will affect us to the tune of about $1 million after-tax. So all said and done, there is about a $3 million swing, negative swing to our earnings as a result of those kind of four high-level items. That is about a $0.25 share issue on an annualized basis.

So the takeaway story we want you to have from this is we do have revenue bias that is slightly up, organic and same-store growth plus the Wisconsin win. We will voluntarily manage the NET margins down by about 200 basis points. You have to factor in the new tax rate. For those of you that are struggling over the impact of the refinance, we basically view that as a wash.

In Q1, you will notice that we are writing off about $3 million, which is primarily the effect of the amortized piece associated with the original debt financing from 2007. The refinancing will drop our yield from L plus 600 -- 650 to about L plus 300. So that is about a $3.5 million annualized savings in interest. Obviously, it will have significant impact for us in the out quarters, but because the impact of the write-off is pretty much a wash for 2011.

So that should allow, those of you that are penciling that in, to come much closer to what we view as kind of an up revenue year, a flat EPS year, giving way to the margin management issues on the transportation side. And with that, Steve, we will go ahead and open the line now for questions.

(Operator Instructions). Bob Labick, CJS Securities.

Good morning. I first wanted to ask -- I guess start with LogistiCare. You have discussed the 200 basis point I guess reduction in rate and it was a very high rate, much higher than you had said it would be. Can you talk about though is that a rate reduction on all of your contracts? Is that just on the new and renewed contracts and -- or is there a utilization difference in here or how do you break it down between rate utilization and old and new contracts?

It is really not rate at all, it is margin. We are not really affected to date at the rate level or renegotiation level or contract rate issue. This is really a margin management issue on our part guiding you to our '11 forecast, which will basically produce a 200 basis points reduction in operating income on the same or a little higher base of revenue.

So it is not a rate issue, it is not a contractual issue, it is not market-driven, it is marketshare-driven and you can understand the subtleties in that. We want to make sure we maintain our current book of business. We want to make sure we keep our competitors at bay so they can't just underprice us and we want to continue the legacy we have had with our payers that we have a tolerable expectation around profit. So the only swing is in the historical margin levels for the Transportation segment.

Does that mean you are giving them more for the same money essentially? Is that the marketshare portion of it?

It means we are going to spend more of their money and less of it will fall to the bottom, so we will improve driver stipends. We can improve benefits. We can reduce caseloads, whatever. You remember we have a 100% or about 85% variable cost model, so in a non-windfall environment, that is when our enrollment trends are predictable and manageable, we can do a very nice job managing margins.

And why we were so successful and to a large extent could not really affect last year's unbelievable and untoppable profitable, that was driven by an enrollment trend that was not forecast and really not manageable. So now that we believe we are normalizing in 2011, we will deliberately manage our margins.

Okay, great. And then so for 2012, it sounds like, barring a change in the industry, since rates aren't changing, this would be kind of a go-forward basis unless things change over the course of the year that you tell us about?

I think that a safe prediction is this should be a normalized expectation for us in the out years.

Okay, great. And then shifting to Social Services, I just wanted to clarify something I think Michael said. In terms of the quarter, gross margins were a little lighter certainly year-over-year. Was that mostly the impact of Virginia and the weather in the northeast or anything else going on there? Can you just (inaudible) us on rates from Social Services?

Mostly the weather in Virginia and all the northeast got pretty slammed in December and December being the month that we really can't make it up in the second half of December because of the holidays.

Okay. So no other changes in margins mostly? That makes sense.

We might add to that, Bob, we didn't guide to the whole year because we are still in contract renewal cycle, legislators are still convening and debating budgets, but I can tell you we are not seeing severe conversations around rates or rate reductions or contract terminations or -- we expect to see our book of business recur.

Part of what we are hoping for is this ideological shift that the Secretary alluded to in her letter to the governors and we are doing a lot of work with states as they try to manage a predictable economy is that their money is better spent in home and community-based services than it is in out-of-home care.

We can't yet define for you the impact of those conversations, but it is our hope clearly that we would gain marketshare in the next couple of years as our pitch in that environment is really quite simple. For every one person you have in a psychiatric facility, we can see six of them in their own home. So in the time of finite dollars, we would expect to gain some marketshare in our Social Services segment and we will know more about that as the legislative budget and contract renew cycles manage through this spring.

Okay, great. And then my last one and I will get back in queue. Obviously, you had very strong free cash flow. I think you just said you are going to pay down another $20 million in debt, but you will still produce a ton of cash this year. What are your thoughts -- acquisitions and uses of current cash load and free cash flow you expect to generate this year?

Two opportunities for us. One is we do remain acquisition-minded. We had a deal that did not close in Q4. We continue to look for both deals in our current space and diversifying opportunities. We also will have to deal with the converts over the next couple of years. So some of that cash may go to tender the converts or it might be used as acquisition fuel.

Okay, great. Thanks very much.

Kevin Campbell, Avondale Partners.

Good morning, thanks for taking my questions. I wanted to start just real quickly looking back at Virginia and Pennsylvania. Pennsylvania I think you mentioned was rebid. Virginia, can you clarify that that is a rebid for you as well?

I will let Herman confirm both of those are rebid. Neither of those should affect us in the current year, but they have begun their process. I do think one of those states is out. Herman, the other you expect shortly?

Pennsylvania, the RFP has already been completed, so they are in the evaluation phase. That contract actually doesn't go into effect until December, although we are the incumbent and that is for the Philadelphia County market specifically, the city of Philadelphia.

And then Virginia, the RFP just came out last week. Timing is to mid-April. Decision is expected mid-June for contracts to start in October. So that would be a fourth-quarter only impact and we are the incumbent statewide for Virginia as well.

And the size of those two contracts, Herman?

Combined, they are a little bit over $100 million.

Okay, great. And then I was hoping you could talk a little bit more about the workforce development, specifically why you are seeing softness there. You mentioned one contract that you decided to exit voluntarily. Is that the majority of the softness in the census or is it spread throughout the rest of your workforce? And again, maybe talk to why that is softer whereas maybe some of your other businesses are holding up?

The rebid, we chose not to go for. What they were doing wasn't asking for in-kind contributions. It was just well beyond even what our margin would have been under that business, but I do think there was some pressure under the workforce development side as far as rates and funding.

The other workforce category would be Canada. The census was down also in Canada. Canada is going through a total transformation of their entire system where they are going to combine provincial and federal funding. We ultimately think it is going to be an opportunity for us, but as they lead up to that at the end of this spring, there is some slowdown following before they implement the new system.

So that census slowdown has started already at the end of last year, probably will for a while until the new system trends occur. So those were the two big majority changes in workforce.

If you look at our primary core business on the Medicaid side, the census was actually up. So I think the core business separate than the workforce is trending higher.

I think consistent with that, Kevin, this states are trying to cut services. The federal budget obviously is being cut as we speak in Congress. Medicaid has some unique protections that these other programs don't enjoy, foster care, workforce, tutoring, No Child Left Behind. You are seeing some pressure on those.

Medicaid, in fact, is up as a result of not only federal stimulus dollars but the President's budget request, the early adopting language on the healthcare reform initiative and also the federal court's intervention that has prevented arbitrary rate cuts being applied to Medicaid. So if Medicaid has a unique circumstance in this current budget environment and that has been relatively sacrosanct. So that is why we see Medicaid census up where you might see census down in these other programs.

Could you talk about -- so these other three areas -- foster care, workforce, tutoring -- can you give us a sense -- obviously, we know what foster care is as a percentage of total revenues because you break that out, but what about workforce and tutoring? How should we think about that just so we have an idea as to maybe where there won't be growth or maybe even some pressures that we can (technical difficulty)?

These are not big (inaudible) of our overall business. Out of $950 million of revenue, I think workforce development is maybe $25 million, $30 million, same for tutoring.

Tutoring is probably about $10 million.

$10 million, yes. So these are not big ticket --- the word Craig used was core business. The use has always been kind of diversification opportunities for us and they represent a very small book of our business.

Okay, that's it. Thank you very much.

(Operator Instructions). Rick D'Auteuil, Columbia Management.

Good morning. A couple things. So embedded in your LogistiCare guidance, one, we had a windfall last year because of the, as you pointed out, the increasing enrollment trends, which have begun to stabilize. Part of that I think relates to the utilization rate that is typically low with new enrollees. Now that it is stable on the growth side, so the new enrollees are not growing on a net basis, what do you expect the utilization to do to margins this year?

Herman, do you want to take that?

I think that your impression is right. The way our model works is we do get the benefit when new folks come on the rolls and either are not the typical acutely ill that need a lot of transportation or just haven't realized the benefit is out there. And as time goes on, if they stay on the rolls and they try the service, they realize it works and they start taking advantage of it.

So some of it will depend on the economic movement out there, but we typically look at it and we are building in a 1 or 2 point increase in utilization. Frankly, that was before gas prices started trickling up and as we experienced back in 2008, when the gas prices hit that $4 plus mark, we saw that have a tremendous impact on utilization as well because people who had cars and typically used to transport themselves kind of parked their cars and started claiming the car didn't work and what have you anymore. So a combination both of stabilization and also the climbing fuel prices will drive that up probably 1 to 2 points.

What is the impact of that 1 to 2 points of utilization on margins? Is that 50 or 100 basis points?

You know, honestly, I can't answer that today. Back in '08, 1 point of utilization we looked at was about $1 million of EBITDA. But with all the new contracts we have taken on in the last year, we honestly don't know yet. We have to wait and see where that utilization falls out and in which programs.

I think it is safe to say that we have calculated that utilization in our '11 budget, which produces an 8.5% margin. So unless there is some significant change to his model, we are comfortable in that zone. We have historically been able to manage our way through dual issues. Remember, we are not directly fuel users, so our driver expense has not really changed much in Herman's model and we wouldn't expect that it would change much. So given everything we know today, his current utilization trends are factored into that 8.5% EBITDA.

Okay, I guess, you know, a slight concern of mine is that this is a self-inflicted margin reduction to some extent. And I am worried that we overshoot because we underperform on a piece of just the operating business. So we are starting to give money to drivers and to employees and then all of a sudden we find ourselves short of that 8.5% or I think 9% would be a better target, but that is from a shareholder's perspective. So I assume you can tweak that as the year goes on to make sure that we are not underperforming that 8.5%, right?

We are comfortable at this level. We do have variability to the model. This is pretty much what we are tracking in January. So yes, we don't think we will, unless something changes that we can't describe to you today, hitting these forecasts should not be an issue for us.

Okay, and embedded in there are the startup costs of the new programs, right, embedded in the operating margin?

Yes, for the ones we already know like Wisconsin.

Right. Well, in Michigan, it sounds like there are some issues with that and it was a drag -- it has been a drag year to date. So I just want to make sure that that is also in there, right?

Yes, the costs are part of the budgeting process.

Okay, on the Social Service Side of the business, what were the operating margins for the year 2010?

7%.

Okay. So one thing you didn't include in your buckets, Fletcher, if our target is 8.5%, we are looking for improvement on that part of the business that you didn't put in your breakdown. What would that amount to?

Probably field bonuses I would expect would be the major difference. Remember, our bonus plan is about 60 people deep. So the number I gave you was management and executives. Included, again, at the field level would be field-based bonuses. So I am assuming, Michael, that is probably the major difference.

Which would be in client service expense for the year, $1.5 million and transportation, $1 million.

Okay. So you are saying you underperformed your 8.5% target last year primarily due to the bonuses that were distributed?

Precisely.

Okay, but my recollection is you have -- I think that third quarter, we lost money in the Social Service business. There were some operating issues in certain programs that hopefully have been addressed and rectified that we should see benefit from this year on top of the reduction in bonuses.

We took some things in Q3 that related to bad debt reserves, other kinds of things given that we had the opportunity to do that. We don't expect any of that to be ongoing issues. So both of these margins we expect to normalize right around 8.5%.

Okay. So I mean it does sound like there, even above and beyond the bonus reduction year-over-year in '11 versus '10, there are some operating opportunities on the Social Services side for improvement.

Craig is nodding.

Okay, all right. So maybe there is a buffer there. Just so I understand, $3 million is the bottom line of the net differences '11 versus '10, minus $3 million?

Yes, that is kind of the net effect of the bridge, improved revenue, elimination of the bonus, the impact of the 200 basis points, the new tax rate, comes to about $0.25 a share, about $3 million.

Okay. So if last year was $1.78, you are kind of looking at $1.53, but with n the $1.53, you are not -- you are counting as an operating number your refinancing costs on the debt, which is I think something like $0.12, right?

That is exactly right, but that should improve in your model over the back half of the year. So take the write-off in Q1 and then the reduction of the yields in Q2, 3 and 4. It is going to be pretty much a wash.

But the street generally looks through that refinancing charge, so I get to a number like $1.65 from a real operating ex the charge and we just kind of pointed out there might even be some upside to that. So not as draconian as maybe what the market is reacting to today with your guidance.

The other thing is on the refinance, you talked about the rate going down 3% or 3.5%, but you didn't talk about what we are -- we have cash sitting on the balance sheet and it is getting 0% interest and debt on the balance sheet, even at the lower rate, which will be a substantial savings, was just debt paydown. What are the plans on that front? And my understanding was there was a feature that, by March 31, you had to -- the debt had to be -- I mean the cash had to be swept out to pay down -- 75% of the cash generation was going to be used to pay down debt. So where do we stand on outstanding debt?

We really appreciate your knowledge, Rick. You are really a great shareholder. As it relates to the credit package, we will no longer have the sweep feature. So we avoided the sweep this year by refinancing before it came due. So that will leave the cash on the books. The current senior debt is about $118 million. We will reduce that to $100 million and leave the rest of that cash on the books for us for a couple of possible purposes.

One is, I think you have heard us say before, we like cash on the books to show prospective payers, particularly in a bid environment, we have the cash to execute a contract. Two, it does give us acquisition fuel for small kind of tuck-in acquisitions. The acquisition market is about six to seven times trailing EBITDA right now, so in order to maintain our less than three times debt leverage ratios, we obviously can't use debt to buy something. So that cash will be available for that.

And then over the next couple years, we are going to have to reckon with the converts. Most of those people probably enjoy that instrument. We don't believe that they would tender it today. So we are probably likely to have to take it out at maturity. We may try to tender some portion of that using that available cash. And I think we do have some earnings on that in our budget. A lot of that is also reserved for the letters of credit that we have to post for many of our contract wins.

To your other point, you are instinctively right on as it relates to cash EPS. That is not a GAAP number for us, so we have been advised not to report that to you. But many companies, in fact, do report cash EPS, which would weight out the write-off associated with the refinance.

Just one comment, the negative arbitrage on having cash on the balance sheet, even if it is to the tune of $40 million versus I don't know the 4% or 5% rate that you are going to end up paying, something like that, is pretty substantial. It is a couple million dollars pretax and that would go -- even if that is all we did and you are going to be generating cash this year too, that would go a long way to paring the $1.65 to where we were last year. So not that much of a hickey from last year's number.

I don't feel real good about paying six to seven times EBITDA on acquisitions when I don't think we are getting much credit for our valuation in the marketplace at under $15 a share. I would almost look at, and I don't know if your bank agreement is going to let you do this, but I would look at buying your own stock back before we go and pay a higher multiple for somebody else's business. Do you have any thoughts on that?

You have been in the room with us. We do have a carveout feature in our current credit agreement that would provide for a buyback. In our prior agreement, that all required senior lender permission. So we will be in a position to do something that we have not been able to do in the past. So your instincts again are good in that regard. I think, Michael, you wanted to say something about the negative arbitrage?

Well, Rick, it takes us an absolute minimum of $25 million on the balance sheet to run this Company. Some of that money is in Canada, some of that money is in our captive, but we really don't have access to go spend. So that is absolutely low level. My comfort range is $30 million to $35 million just to run this business week in and week out. So that gives you some perspective of why I like to have around $40 million on the books at any one time. And as Fletcher alluded to, we will spend $15 million to $18 million on paying down debt, fees associated with the refinance, the anticipated refinance here posthaste.

Okay. And then just, I'm sorry, the last one I will throw out there, on the Social Services side, you are looking for mid-single-digit kind of growth?

Yes, at this point, that is kind of our -- we expect our historical average is to low single digit. We are not seeing any significant issues around rate or renewal. We will know more about that here over the next 60 or 90 days.

Okay, and I just want to point out, on February 7, you were at a conference and I believe you said 8% to 9% on that growth on that side of your business just about a month ago.

That is our historical basis and we typically average that. If you look back at us over the years, you know part of the reason we haven't guided this year is it could be better than that, it could be worse than that. But that is in fact the historical average of our Social Services segment growth year in/year out.

Okay, thank you very much.

(Operator Instructions). Mike Petusky, Noble Research.

Good morning, guys. Just a quick comment. I really -- God knows I couldn't run a publicly traded company, but I think I could have probably written a better press release. It feels like you made us guess at some of the good things, but you put all the bad things in there because my first passthrough when I read this release last night, I was coming out to about $1.35, $1.40 in adjusted EPS and obviously the number is going to be more like $1.60 or $1.65 it sounds like. But anyway, sorry for the complaint, but anyway. Can you guys clarify when you might hear something on Texas?

Herman, anything new?

I wish I could, but we can't. Texas had a timeline when they originally put out the RFP. They have, at one point in time, communicated that the decision had been -- their term -- postponed indefinitely or delayed indefinitely. They gave no more information and have refused to give us any real timeline at this point.

We are receiving questions from the agency pretty much recently on a daily basis in terms of clarifications on the RFP submission. So it appears that they are working on it. But we really don't have any definitive timeline to give you.

Do you think getting questions like that is a good sign, bad sign or neutral?

It is common. I mean in almost every RFP process, there is some kind of clarification or they get into it and realize they didn't ask the question exactly the way they wanted. Texas is an extremely complicated RFP and a complicated program because they are under some legal constraints out of their (inaudible) case that they have there and a lot of their questions relate to ensuring that if they outsource this how is the contractor going to handle abiding by their [true] requirements.

And the Wisconsin business that begins or goes live at the beginning of the year, what is the annualized revenue run rate on that business?

When that RFP was done and kind of came out, it was first put out and then they brought it back in and adjusted some numbers. The adjusted numbers based on the program that we initially will start is probably $30 million to $35 million annually.

And hey, Fletcher, can you talk about -- I didn't catch it if you mentioned -- the M&A opportunity you guys passed on, was that a -- or couldn't come together on, was that a home health business or could you just speak to that?

We have an NDA there, so I can't specifically talk about the opportunity, but I think we have shared publicly that our interests are not only in vertical existing lines, but in diversified strategies. In that regard, we see the opportunity to migrate into home health very powerful for us. The sector is in a little trouble with the payer establishment given the comments we made on the first part of our call that we are endeared to our payers regarding our own margin expectation. We have had a lot of unsolicited interest in our interest in the home healthcare space, which could include skilled nursing, hospice, OT, PT, kind of endeavors. So if we were to acquire, it should not surprise you that it would be in that space.

I mean would you expect just kind of looking out over the next nine months or so -- I mean do you expect to get a couple of deals done in '11? I mean is that a reasonable expectation?

We would hope to. They are very challenging in today's environment because you are dealing with many times private equity backed companies who want to sell their business off a trailing EBITDA. They also are coming off an unprofitable year and we know that their margins are going to come down. So it goes to how you value the business.

And just one last question. When the Virginia LogistiCare contract is awarded in mid-June, I assume that is a press releaseable event whether it breaks for you or against you, is that right?

We typically have signed agreements when we bid and we are not allowed to discuss the bidding environments. What usually happens is the state will post a notice of an intent to award on their website. So the most definitive source we can give you regarding that news would be each state's procurement website and that is typically the same way we find out.

Okay, but would you then -- okay, so you pull that off the website.

And then we usually do not announce because it is protestable. We have not finalized the negotiations with the state and then we typically have signed something prohibiting us from making an announcement.

And actually just one quick clarification. I think it was mentioned earlier that the Virginia business and the Pennsylvania business combined were somewhere over $100 million. Virginia is the lion's share of that, right? Can you size those -- I guess size Virginia and I will guess at the rest?

Virginia is call it approximately $70 million.

All right, great. All right, thank you, guys.

Kevin Campbell, Avondale Partners.

Just a couple of additional questions. You have given some thoughts on operating margins obviously for both segments. Can you give us a sense as to where the, if we look at client service expenses as a percentage of revenue and the cost of NET, maybe where that will shake out? I am assuming NET will be -- last year, it was 88.2%. So maybe that is up 200 basis points and we can forget that discussion unless there is anything wrong with that. But maybe the client service expenses, you were 88.1% of revenues in 2010. Presumably, that should come down because, based on Rick's comments, you would go from what 7% to 8.5%?

I think you are confusing operating margin and EBITDA margin. You should think of Social Services as pretty stable margins year-to-year and again, the LogistiCare margin is coming down a couple hundred basis points.

I think it will improve to the extent you back out the field-based bonuses, so that is identifiable and we can work with you off-line.

Okay, that would be helpful. Maybe just give me quickly, Michael, the operating income and the D&A by segment for the quarter. I think you might have said it for the year, but for the quarter would be helpful.

Can we work off-line on that? I am glad to do that with you.

Okay, and then maybe this last question, you said $3 million, but when I total the four things that you talked about, so you said basically $3.5 million from the growth in I guess LogistiCare at 8.5% margins, that was $3.5 million, $4 million on the bonuses, that is $7.5 million, the negative $11 million from the 200 basis points on LogistiCare and a negative $1 million, I get negative $4.5 million, not the $3 million that you are talking about.

One of them is pretax. The tax rate (inaudible) after-tax. So again, we can work through your model with you, but the EBITDA increases, operating income increases off new revenue is pretax, bonus is pretax. The net was pretax. The tax rate is off of operating income. So that is an after-tax number. So we get to about $3 million and change. And we will work with you on your model.

Okay, perfect. Thank you very much.

Tyson Bauer, Wealth Monitors.

Good morning, gentlemen. The bonus decision, that includes that assumption this year, you talked about $4 million and then later you talked about field bonuses of $1.5 million. I was wondering if the $4 million was inclusive of that $1.5 million or is the $1.5 million an additional subtraction.

There is two levels of bonus. The corporate bonuses, that is state directors, regional VPs, officers, would be in the $4 million number. The field bonuses would be below that and would show up in the operating expenses or client service expense. And I think Michael gave those.

Right. So on total, we have got $5.5 million in bonuses that we are not expected to incur in 2011. What is the basis for the assumption? Are we maintaining financial thresholds that we had in 2010 that we don't believe we are meeting or are there other factors in which justifying not thinking we are going to be paying any bonuses this year?

We typically don't budget the bonus. Our bonus plan requires us to beat the plan plus the accrual. So in order for those 60 people to be bonus eligible, we have to beat our forecast, which is the same number as we give you and we also have to beat it by enough to accrue for the bonuses. So typically, we don't budget for that. If it occurs in the year and last year was extraordinarily unusual in this regard, we believe we accrued that in February. So normally you wouldn't even see that (inaudible) until third or fourth quarter typically.

So if we are beating plan significantly and it appears that our forecast provide we will do that for the year, you might see us begin to accrue for the bonus. Otherwise, it is a look back at the year after year-end and we have to beat EBITDA plus the accrual.

Okay. What is implied is we have got to get better than $5.5 million from your internal target just for the shareholders to see any incremental benefit?

Right, that's correct.

Okay. In regards to the LogistiCare side of this, we talked about the 200 basis points going down early in the year. As you do the rebids in Pennsylvania, Virginia and you have actuarial adjustments midyear, should we not expect another leg down given the contract environments, the rates that we have seen awarded in Iowa, Idaho, Nebraska, amongst others? Won't that dictate that we will actually see rates go down further at the end of this year?

We don't expect that. Part of what we are doing strategically is to make certain that we can stay competitive. We won the Wisconsin bid even though we were the highest priced bidder. I think as you know, most of these contracts price is not the only factor, the weighted factor. So we think as long as we don't give significant ground to our competitors, we will win technically and we have got to be in the hunt on the pricing side.

So we don't expect to give the business away. A couple of those bids we opted not to chase down and I think only one of those was really lost on a straight cost basis. So again, we are not anticipating further competitive pressure as we bid on new business or rebid these incumbent contracts.

Are you hearing similar things as to the future of access to care? Is that an available asset right now in the marketplace?

We have not heard one way or the other. I think most people know that their parent is going private. It is probably too early to tell if that is a division they intend to keep or would be inclined to spinoff. It is widely known we would be interested if that was the case, but I think it would be unbelievably premature for us to speculate what their new owners intend to do.

All right, thanks a lot, gentlemen.

Rick D'Auteuil.

Yes, just a couple of quick ones. The acquisition that you worked on in Q4 that didn't close, what were the estimated costs related to that?

$225,000.

Okay, so that pretty much would account for the shortfall versus consensus. Again, somebody pointed out that you guys kind of threw all the negatives in there and didn't -- let the street carveout the positives. I would encourage you to include those kind of things in future releases so we don't get quite the violent reaction that you caused on the stock with your release last night. And I mean just to put things in perspective, the low on the day was $13.38 and it is back to $15 now that things are starting to get clarified on the call. So again, I think there could have been a better constructed release to explain some of these things in a little more detail.

The other thing is -- so let me understand the bonuses. My understanding is, last year, because we were having such a special year, we went above and beyond normal bonuses and did this extra $3.8 million or $4 million for these 50 or 60 people. But there were bonuses paid above and beyond that is my understanding. So what were the total non-salary incentive comp -- what was the total paid last year across the enterprise?

$5,628,300.

We have a number of tiers there in the plan. The target is the budget -- we have to beat the target and achieve the accrual. Our maximum bonus companywide is 150% of salary and last year, we did, in fact, trigger the max for everybody that is in the plan. And that is just short of the $6 million number that Michael just gave. That would be a similar exposure again at the maximum level. You could cut that in half to achieve just the targeted number. Again, we would have to beat plan and achieve the accrual.

Okay, so if this year -- what is the -- is the bogey this year what you just communicated to us?

Yes, the forecast would be our EBITDA budget for the year, which we have not released yet. I think most of you are pretty close. We would have to achieve that plus the amount of the accrual. So the first tier is basically 100% of salary and it would be something in the neighborhood of $3 million, $3.5 million. So we would have to beat plan by $3.5 million plus $1 in order to achieve the accrual.

The last year was an extraordinarily unusual year. We do not normally pay these kind of bonuses nor do we anticipate that we would continue to pay these kind of bonuses in a normalized year. And it was, again, primarily due to those Medicaid enrollment windfalls. So in order for our team to achieve that, we have to beat the forecast plan.

So again, it is a little confusing. So whatever the forecast EBITDA is, if you beat it by $3 million, there are no bonuses paid or will $3 million be paid?

We would have to beat it by the accrual. So if we beat it by $2 million, nothing gets paid. If we beat it by enough to afford the accrual, then the bonus payment would bring us back to our forecast basis. So I think Tyson picked up on that by saying the first $5 million of incremental profit will go to the management team in the form of a bonus, but, again, that is only if we beat these forecast numbers.

Okay. All right, thank you.

Thank you very much, everyone. We got the message loud and clear regarding the release. It is always a challenge to guide down. It is always a challenge given that we have multiple listeners to this call, not only you, but our competitors and payers. So we will take that to heart. We will be on the road visiting with many of you and if you didn't get something today, please give one of us a call. Thank you very much.

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