ModivCare Inc (MODV) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to first quarter 2011 Providence Service Corporation's conference call. My name is Karma, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. (Operator Instructions) Later, we will conduct a question-and-answer session.

I would now like to turn the call over to your host for today, Ms. Alison Ziegler at Cameron Associates. Please proceed.

Thank you, Karma. Good morning, everyone, and thank you for joining us this morning for Providence's conference call and webcast to discuss financial results for the first quarter ended March 31, 2011. The press release was issued last night. If anyone would like to be added to our 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 -- I'm sorry, until May 17. The replay number is 888-286-8010 with the passcode 68227993. 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 10-K for the year ended December 31, 2010.

The Company's forecasts are dynamic and subject to change. Therefore, these forecasts speak only as of the date of this webcast, May 5, 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, Alison, and good morning, everyone. On the call today in Tucson is Michael Deitch, our Chief Financial Officer; Craig Norris, our Chief Operating Officer; and with us from Atlanta is Herman Schwarz, the CEO of our LogistiCare subsidiary. We will all be able to take your questions following our scripted remarks.

While there are challenges and consistent headline contingent, we like the position we are in vis-a-vis Medicaid. We should continue to benefit from a tightening environment. CMS recently released new rules to make it easier for states to reallocate money away from out-of-home care to in-home care. States still spend approximately 60% of the Medicaid dollar on out-of-home care.

As expected, with states facing difficult economic challenges, several more states are seriously considering adopting our NET model. Due to our success in New Jersey, the State had expanded the number of counties where we provide NET services, which will increase our revenue there by about $20 million annually. I will let Herman discuss the short-term utilization impact, which should be mitigated in Q3.

We are dealing with rising fuel costs and while we see some related increases in utilization, our model unlike the fleet operators does not put us at direct risk for deals. The fundamentals of our business remain strong. The Medicaid-driven census is up, even though our State census may be flat. We received great feedback from our payers regarding our continued efforts to maintain tolerable margins.

We are entering in our Social Services contract cycle, where we do not expect any significant renewal issues, but do expect relatively flat rates. We have a couple of States that I talked about moving to managed care in which case we will have to work through those system changes.

As Herman will discuss in more detail, we have several outstanding bids on the transportation side. We have recently settled our lawsuit with the State of Missouri, as this contract you'll remember we lost by [17,100s] of a point that will prevent our competitor from increasing their rates without the State putting the contract out for rebid.

I'll let Michael walk you through the quarter.

Good morning, everyone. Our first quarter of 2011, revenue totaled almost $228 million, which was a record revenue quarter for us, up from almost $221 million for the first quarter of 2010, a 3.1% increase. All of the increase was from internal organic growth.

First quarter operating income totaled $13.7 million, which was 6% of our revenue. This compares with $19.9 million and 9% of revenue for the first quarter of last year.

First quarter net income totaled almost $4.5 million, which was 2% of our revenue. This compares with $9.1 million and 4.1% of revenue for the first quarter of last year. Included in net income for the 2011 period is a non-cash charge totaling almost $2.5 million for the write-off of deferred financing fees associated with our former debt facility, which we refinanced during the first quarter.

First quarter diluted earnings per share totaled $0.34, with approximately 13.3 million diluted shares outstanding. This compares with $0.66 and approximately 14.9 million diluted shares outstanding for the first quarter of last year. The diluted earnings per share amount for Q1 of last year is not readily computed from the income statement. The computation results from the effect of accounting for our convertible debt under Accounting Standards Codification Topic 260, Earnings Per Share. I would like to direct you to footnote number 13 in our Form 10-Q, scheduled to be filed tomorrow, which discloses the details of our earnings per share computation.

At the end of our 2011 first quarter, our days sales outstanding was 35 days and management fees days sales outstanding was 159 days. At the end of our 2011 first quarter, we had $57.6 million in unrestricted cash. Cash provided by operating activities totaled almost $12.7 million in the quarter.

During the quarter, we paid $2.6 million in fees related to our new credit facility. As of today, we have not drawn any funds from our revolving line of credit to fund ongoing operations.

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 approximately 60,000 clients. This is a decrease from the prior quarter of roughly 2,000 clients. This reduction primarily reflects the impact of lower census in our workforce development division and our community probation services.

Medicaid-funded census, however, continues to trend up year-over-year by about 600 clients and sequentially by approximately 3,000 clients.

We had over 9.5 million individuals eligible to receive services under our LogistiCare division, an increase of over 1.5 million eligible members compared to the same quarter in 2010. All direct and indirect clients are being served from 438 offices in 42 states, the District of Columbia and Canada. Combined with our owned and managed entities, there are approximately 10,500 employees serving 1,000 government contracts.

On the Social Services side, performance in the quarter was ahead of plan, due to strong performance particularly in our school-based programs even despite various periods of weather disruption. As Fletcher mentioned, a few states are looking at various forms of managed care as a means to bring more efficiency into their behavioral health systems. We are involved in all these initiatives and will continue to promote the efficiency and effectiveness of our services.

As always, we are monitoring State budget issues and we will continue to stay integrated with our payers and other various stakeholders within each state.

Now, I will hand off to Herman for more details on LogistiCare. Herman?

Thank you, Craig. NET segment revenue was up 4.9% over the same quarter last year. This growth occurred despite the fourth quarter loss of the Missouri contract, as we experienced positive revenue impacts from new programs in Michigan, New York and California, expansion of the New Jersey relationship and increase in membership year-over-year across many contracts.

We anticipated margin compression compared to last year's first quarter due to the loss of that Missouri contract and the impact of the higher utilization in New Jersey as the transition of the counties into our program was completed. Unfortunately, we have experienced significantly greater transportation expense in New Jersey in the first quarter than the State agency's data have indicated.

The trip mix and driving distances associated with this New Jersey expansion had a material impact on our total transportation expense in the quarter. We are reacting to this trend in several ways, including working with our client to establish new rates effective July 1st of this year. These rates will reflect a higher cost associated with performing an expanded program and will compensate us with the appropriate level going forward. However, based on budget constraints from the State and fiscal year timing, we must continue to work with the rates in existence right now through the second quarter.

We are also obviously monitoring the troubling trend in fuel prices across all of our operational geographies. As Fletcher indicated, this is not a direct expense for us, but it is important that we maintain the health and stability of our supply base. To date, we have reacted to the rising prices as needed and we will continue to assess on a case-by-case basis the need to supplement the payments to transportation providers to compensate them for their increased cost to operate. So far, the impact of our actions has not been material.

In terms of business development, we are still on schedule for a July 1st start in Wisconsin. This implementation seems to be going very well and we are appreciative of the cooperation and collaboration we are receiving from all of the stakeholders in the state. We are still waiting to hear on RFP decisions out of Texas and on our Pennsylvania rebid submission. We have also recently submitted rebid responses in Nevada and Virginia. The Nevada decision is expected in the next few weeks and Virginia in mid-June.

With that, I will turn the call back over to Fletcher.

Thank you, Herman. Let me briefly touch on our current guidance and then, we will open the line kind of for questions. We are pretty much executing according to the reduced margin forecast we discussed last quarter, the one exception, of course, as Herman described, is the State of New Jersey, where we have agreed to allow the State to expand our contract, adding approximately $20 million a year of annual revenue.

As Herman explained, we have experienced higher-than-anticipated expense. There, the State has remedied the situation, but not until an effective July 1st. All other things being equal, we expect this will reduce Q2 earnings by about $0.05. We remain optimistic about the outstanding rebids and the new business we have bid on in our NET segment.

While we provided guidance for the second quarter, which calls for diluted EPS, given the impact of New Jersey, we will wait for full guidance until after the second quarter.

Karma, with that, we will go ahead and open the line for question.

(Operator Instructions) Wes Huffman, Avondale Partners.

Hey, good morning. Thanks for taking my question. I think you guys touched on this just a little bit in your prepared remarks. But you're seeing a strong demand for Social Services with the direct client census being down year-over-year and I think you alluded to that demand from Medicaid was strong, but other state-funded services are a little weak. Could you tell us what percent of Social Services revenues are Medicaid funded versus State funded?

Sure. I think Michael has got that pretty much in detail. The lion's share of our business, I think, Wes, is Medicaid driven. That includes the home-based side of our business and the transportation piece, obviously. So the current federal drivers support us. The tuition programs are also federally funded. The state-funded programs like foster care and corrections, we are seeing flat or down as a result of the State budget issues and they represent a small book of our business. Michael, do you have them?

We've got about, well, [85% to 90%] of our businesses.

Okay.

And foster care represents?

Foster care for the year will be about $38 million, [yes].

And workforce development, I think is pretty close to that.

Yes, $50 million.

So between the two, Wes, you're talking of $80 million over almost $1 billion of business.

Okay. So how long should we expect pressure on the state-funded programs to last?

Certainly through the next fiscal year. I mean, we don't see any relief economically for our State payers. We don't see dramatic cuts coming from those State programs, but they remained, I think it's safe to say, relatively flat. Again, the primary driver for our business now and well into 2013 when healthcare reform kicks in, it's going to be a Medicaid policy and Medicaid [clinic].

Okay. So, if we were to combine Medicaid services and the state-funded programs, what should be our expectation for year-over-year changes, say, in the total client census for the second quarter?

I'm not sure we can tell you. Most of the impact we see comes with the contract [SIFO], which would be in Q3. We have been pleasantly surprised with the incentives trends. They seem to reflect the federal government's ideology and request that the states to increase their home-based services, but it is not necessarily a budgeted increase. So, we continue to expect that will trend up. I think we indicated last quarter that overall, we would expect that part of our census to grow in the high single-digit range, 8%, 9%, 10%.

Okay. And when we talk about pricing, I know that we model it by looking at revenue per client. So, what impact will the decline of state-funded contracts have on pricing? And I guess in other words, are state-funded contracts lower or higher priced relative to Medicaid when you look at it on a per-client basis?

It's probably a flaw in the model because they are [based] dramatically differently. Foster care is a per diem. Workforce development is a contract amount for a client. Our home-based services are hourly. So, there really isn't a per-client revenue model that's going to work unless you were to design a per-client revenue model by product line. And we can help you do that offline, but if you want to continue try and model the business revenue per client, you probably will need to separate the product line.

I see. Okay. Thank you very much.

Okay.

Rick D'Auteuil, Columbia Management.

Good morning.

Good morning.

So just a couple of things on the revenue side, the NET division revenues were sequentially only up 2%, $139 million compared to $136 million and yet, the census is up significantly something like 17% sequentially. Maybe you can help explain what's going on there. I know there might be a little lag, but that seems extreme. So what -- and maybe the timing of when the census -- did it all come on in the last week of the quarter or --?

[Do you want to answer that, Michael]?

And Rick, when you say sequentially, you're looking at fourth quarter to first quarter?

Fourth quarter to first quarter, the census went from $8.2 million to $9.6 million and yet, your revenues were up 2%.

Right. And the function in membership is really coming from two areas, it's the implementation of Michigan and it is the expansion in New Jersey. So the expansion in New Jersey did trickle in over the course of the quarter and the population that came in under that expansion actually is at a very low PMPM rate, which is the reason why we've gone in and worked with rates with the state.

So, from a revenue perspective, you're looking at a -- if you were to model our business, which you shouldn't do. But going back to the last caller, if you kind of try to do it on a revenue per member, both Michigan and New Jersey would be lower revenues per member. They are also lower cost and that's how we do a PMPM if you think about it. I mean that's the whole magic in our model is the PMPM is set relative to the anticipated utilization and the cost to serve. So both Michigan, at the way we're recognizing revenue, it's an admin-only contract. So that's a very low PMPM and then, you've got the New Jersey population coming in, which is more healthy. And so, you get a lower PMPM on that as well.

You didn't get reset on the core New Jersey business at the same time you took this on, did you?

No.

Okay.

So it diluted the average PMPM in New Jersey down as we took on the new population.

And Rick, we do measure that census on the last day in the quarter, that's the reporting date for census. So it would not factor in revenue if the census came in toward the end of the quarter and that's exactly what happened in New Jersey.

Okay. And but Michigan started when?

Michigan was a January 1st start.

Okay. So we should see -- give me a sense, so in the breakdown of the revenue guidance you gave, what would the net business or the LogistiCare business be in that revenue breakdown. For Q2, for Q2.

It's flat with Q1, Rick.

Okay. Again, so then, I'm going back to the same question. Now, with all of the census in, we're still not getting any revenues for -- we're seeing significant margin decline if we're not getting revenues for those incremental New Jersey folks that came in at the end of the quarter?

And part of that is because we accepted a rate effective July 1st. So we would not anticipate revenue increases associated with that.

No, but Fletcher, you got three months of revenue now in the counties, when you had just a few weeks of revenue in the first quarter. How come we're not seeing incremental revenue for having an entire quarter of New Jersey counties that you added?

I don't know, we probably have to go back and look at the forecast.

Okay. I mean, I'll follow up offline when you get a chance to do that, that something is not adding up there, but a quarter ago, you expected your business to grow 5% -- I'm sorry.

[I'm sorry, I'll take that].

Yes.

Part of that is because we had some timing of new business in the estimated budget originally that is not going to come in on the timing that was expected. So some of that New Jersey increase is offsetting the fact that a program in Hawaii, we thought we would have by now has been pushed off.

Yes, but that's not -- again, going back to my argument, that's not in the census, right? So the census is up 17% sequentially and even if it's flat from Q1 to Q2, we only got a 2% bump in revenues and you're expecting flat revenues in Q2. Something, there's margin -- serious margin compression if that's what's going because --

No, again, it's not margin compression that way, because I mean we haven't had any rates adjusted, which would be the cause for margin compression. If it's a reduction in -- again, in an average PMPM, then the cost to serve should be proportionately lower as well. Now, in the case of New Jersey, you can't say that there is margin compression for that reason, because we know that we need a higher rate in order to maintain the same margins we had in New Jersey -- or expected in New Jersey.

Okay.

So only in New Jersey, could you really talk about margin compression as a function of that adjustment in revenue.

Okay.

But we haven't had any rate declines anywhere. So I mean, if -- there may -- we all -- we'll go back and look at the model, maybe we just didn't take into account all of that county work as we relooked at Q2.

No.

But we also may have been a little conservative just because we know the expense is up.

Okay, okay. Well, I'll follow up offline on that one. On the Social Service side, there was no growth year-over-year, I think and yet, I think, Fletcher, you were looking for at least mid-single-digit growth for the year. So we heard some of the puts and takes, and margins were pretty good there at least compared to last quarter where they were depressed. So what -- do you have a new outlook, at least short term, on the growth as it relates to Social Services?

Typically, we don't see census increases in this quarter. Remember, Q1 of last year was an extraordinarily good quarter for us in terms of census increase. Were up approximately 700 clients on the Medicaid side, that's offset by some decreases on the State side, which Craig talked to. We [remodeled a 7%, 8%, 9%] growth in our Medicaid population.

So we don't see anything there, Rick, that's going to be differently. We will know precisely by the time our contracts take effect in July if stage one has to take on additional volume. That's one of the reasons we're holding off and guiding that for the whole year. So, we don't expect rate issues. The bias at this point appears to be volume up. We'll know that over the quarter as we negotiate the recycled contracts.

So, to the extent that that segment grows, it sits back-end loaded with the census growth in the second half?

Yes. It comes with the contract cycle, it runs July to June.

Okay. And then, on the balance sheet side, so, there were some -- a little bit of debt paydown this quarter. Quite frankly, I think, it was disappointing that more of that cash that you're getting 0% for, we're making a negative spread on it by paying the interest rate. And I guess, I'd like to hear what is the thought on the $56 million in cash? You think a quarter ago, you needed $20 million something to operate your business, that means you've got $30 million and counting of excess cash that we're not getting any return on yet, we're paying interest. So, what's the thought on that?

I think we've discussed that before, Rick. We like to keep a strong cash balance sheet for a number of reasons. One is, in the bidding environment, cash is king. So when you bid on a contract, one of the things states do is evaluate your capability to execute a new contract. They look to cash on the balance sheet as one of the ways to that. No, we've always felt that $50 million was a strong position for us as a bidder. So it's unlikely that we would go below that, just to keep our capabilities in the bidding environment as competitive as possible. Otherwise, we could pay the debt down, but I think it would affect us in the competitive cycle.

So your competitors that -- and I know some of them are mom and pop types that are winning business, they have comparable balance sheets and --

If they win, they don't win it on financial strength. They would win it on -- we've only lost a couple, one of them was to technicality, one of them was rate. So, generally, we score the maximum amount of points when you look at financial strength. One of the things that's [weighted]. And we would give up a couple of points if we diminish it. It's an arbitrary number, it's just something we've always tried to keep on the books.

And then, lastly, what was the accrual for bonuses in this quarter?

Hang on Rick. $140,000.

Okay. Is that primarily for field level management or is that senior or what is that for?

Senior level management. It's a piece of our bonus program, the smallest piece.

And you've seen the recent announcement on the 2011 comp plan, 20% of the officer's bonus is non-financial. So that would be that piece of that. That would be MBO-type bonus, Rick. We've not included anything for the EBITDA-related portion of our bonus.

Yes. I mean I saw that there was golden parachutes in a takeover that we're significantly bumped to, is that what you mean by the MBO piece?

No. That's probably in the contract. Our compensation plan provided for a new tri-level bonus. You have to go through the 8-K, we will be happy to talk you through it.

Okay.

But it includes three levels of EBITDA triggers [were the NEO] and a 20% of your cash bonus would be determined on non-financial goal. And that's the only portion that Michael has accrued for.

Okay. All right, thank you.

Jack Sherck, SunTrust.

Thank you very much. Most of my questions have been answered. Mike, I was just curious, you mentioned on, looking for flat rates during renewal season. Just refresh my memory, what were they last year?

They're always typically small, 1 point, 1.5 points is kind of what we see -- what you would -- probably a cost of living increase. Where it's never been a lot of upside in our rate, it's always been a volume story for us and we do expect to continue to see volume increase.

Right. And then, on LogistiCare, what percentage of their contracts are cascaded?

Almost all of them, I would think, Herman. Is that safe to say?

That was 80% to 85%.

Okay. And then, I guess just finally, I remember, the last time we had real spike in fuel prices, LogistiCare saw a big pickup in utilization. And are you seeing that anywhere at all yet or is it still too early to tell? And if so, what kind of plans do you have in place to offset this?

Well, we're seeing, we are starting to see some impact of -- well, what we attribute to the fuel price spike in utilization. I'd say, we've seen it -- if you exclude New Jersey, which we talked about as kind of a different animal this quarter, the rest of the programs have bumped up about 0.5 point higher than they were last year. And that's -- we attribute that to fuel prices, primarily.

And also, there's two kind of elements going on. There is the fuel price and then there is also the fact that you'll recall that we had a significant period of membership growth over the course of the last two years. And we've always said that, as members come on to the program and get used to -- and start trying to use it and as those fuel prices drive them there, they become more permanent users.

So, it's a function of having been in the program now for a year -- six months to a year and starting to take advantage of some of the benefits they might have had, plus fuel driving them there. So, that 0.5 point is something we're watching. As I indicated in my remarks, we try our best to only respond as needed, where we think our supply base is in trouble and that's always kind of a gray area. We watch to see if anybody is closing up shop if anything.

If our client starts hearing things from their constituents, these are still citizens of the State and will complain at times to the agency. We will go out and at that time, put out supplements -- fuel supplement payments and things like that. We will not increase rates because that tends to stay in permanently. So we do it through what we call fuel supplement checks.

The other way to offset that is, we're always looking for ways to move business to lower-cost alternatives. You start looking at the mass transit, start talking to your client, a little bit more about getting the flexibility to maybe put more people on mass transit if they've been hesitant to do it in the past and those kind of things to try to reduce the mileage that people are having to drive and the number of commercial providers we're having to use.

Great. Thanks very much.

(Operator Instructions) Mike Petusky, Noble Financial.

Good morning, guys. Just a few questions. I just want to clarify, and maybe you said this and I just missed it, the relief that you're going to get in New Jersey in the NET business, will that essentially be comparable to what you're getting paid in the rest of the contract? Is that the plan?

Well, what we've done, Mike, is, we've gone in and changed the rate structure with the client a little bit. There were different populations in the original contract with different rates. And so, with this new population coming on and some of the other changes the State has made, we're just basically going to one blended rate.

So, it will flow through against everything. But the impact will be taking into account the higher cost to serve this new population that's been added to the program and the other element of the program, we really have not experienced increased cost or anything there. So, it will maintain kind of the affect of compensation for that group to sign.

Okay. And you said, at the outset of the call that that would add another $20 million or so annually to that contract?

Correct.

Okay, right. And, I guess, staying on the net business, and I'm sorry about this, but Herman, you were talking faster than I could write. I heard you say that we're still looking for a Virginia decision mid-June and then Nevada, a decision in a few weeks. But I didn't catch, you mentioned two or three States right before that, that may have been RFPs you had put out by, I missed that whole piece. Can you just --?

I mentioned Texas and Pennsylvania. And to be honest with you, I didn't give you any timeline because we have no idea. Texas has been ongoing and that's a new area for everyone. They're looking at going to a capitated model, which they have not had in the past, a full broker. So, their timing is completely off the grid from where it started and what they had posted.

The latest indication of timing we had gotten from them was in a conversation, they indicated they wanted to have a decision by the end of their fiscal year, which is August. We have been, over the last few weeks, answering a series of questions about our RFP response and follow-up questions. We haven't gotten anything in the last week to ten days. So, we're assuming that at this point, they are in kind of the analysis assessment period and moving forward with that same concept of trying to get it out before the end of August in terms of a decision.

Pennsylvania, we are the current incumbent. This is for Philadelphia County, specifically.

Right.

That contract expires in November of this year. So in order -- if they were to choose to make a change typically in our industry, it's a 90-day implementation period. So if you work back in November 90 days, that would kind of be the drop. They probably have to come out with a decision. So what is that? That's October, September, August? Late July, at the latest, early August.

Okay. So I guess the Q2 earnings call could be interesting in terms of both of those potentially?

Correct. And obviously, Virginia will have come out before the Q2 call as well, which is our second largest contract. So --

Just to ask one quick follow-up on, when you kind of get the back and forth like you described in Texas, I mean based on the questions that are asked, I mean, do you have a good sense at this point whether these are the kind of questions that usually end up with a win or a retain or is it just there is no way to tell?

Well, I mean, honestly, Texas has been a different animal altogether. We typically do not get -- when we get follow-up questions on a typical RFP, you're usually getting two or three and it's more around -- in this part of the RFP, you answered this way and this part you answered what we perceived to be a different way, can you just reconcile those differences?

And you're talking about typically, with our RFPs, I think, the most -- I've been here four years, the most questions I've ever seen in that kind of scenario are about three, three clarifying questions. Texas has been mind-boggling in terms of what they've been asking. And a lot of that, we believe, is stemming from a court case that they are currently -- a consent decree they are currently operating under, associated specifically with Medicaid transportation called Frew.

And so, we can't tell whether they are being extremely due diligent about making sure that whoever they pick understands the implications of Frew and what they're going to have to do to continue to manage the program and compliance with Frew or they are looking at it from a standpoint of, are we taking too much risk in outsourcing this even though the legislature has required us to do so? Is this going to put the State at extreme risk because nobody can handle Frew like we handle Frew? A lot of their questions seem to be around risk management and how we would handle certain situations.

And frankly, part of the problem is, we don't know how their orders have interpreted everything in Frew. So while we will read Frew and look at what they've provided and do our best to try to say, here is how we're going to handle that situation, it then turns around their response as well. Our attorneys have interpreted this element of Frew differently than you responded, how would you respond to that? So it's been a little bit of this kind of give and take, back and forth. So, it's really hard to tell.

I mean given Frew and given where we stand in the marketplace in terms of our size and our critical mass and our experience, you would like to think, they would look for a more experienced broker, a bigger broker to take that on, but AMR which is one our competitors is already active in the State. So you just don't know. I mean honestly, I couldn't handicap one way or the other for you.

Okay. All right. And then, I guess, one probably for Fletcher, I think I've asked this a couple of quarterly conference calls, but in terms of a M&A activity, you had mentioned earlier, you'd like to keep above $50 million, which don't give you a lot of room to do M&A stuff. But just curious, if you feel like you're any closer on that, if you expect to see something over the next quarter or two that you close on, can you just speak to that, Fletcher?

We would -- we could do a small acquisition, Mike. We also have nothing drawn on the credit line. It would make sense to do something accretive if we're doing at. One of the features from our current syndicates under the refi is, we negotiated what's called an accordion feature. So if we did have a use of proceeds where we'll have to go back to the syndicate and draw down further dollars. So we can fund an acquisition, say, up to $100 million.

We've indicated our continued desire and interest in the home health space. I think everyone knows we had an acquisition that did not close in Q4 of last year that would have given us the platform in this space. We continue to hear interest from payers about us diversifying into that model of delivery given some of the problems they had with other for-profit providers. So we fully expect that sometime in 2011, we will be able to announce an acquisition into that space.

The challenge for us, quite frankly, has been around valuations. The Medicare rates are down. Medicare has introduced new authorization procedures, which we believe favor a company like us, but it's also going to affect any sellers probably trailing EBITDA. So most of these have been private equity owned and our challenge is they've been around, how do you value the business off of the trailing EBITDA that's probably going to be reduced.

Right, right. Okay. All right. Very good. Thank you.

Thanks, Mike.

And there's no further questions, I'd now like to turn the call back over to Fletcher McCusker for closing remarks. Please proceed.

Thank you, Karma. Thank you, everyone. If we did not get to your question, Michael, Craig and I are in the office in Tucson. Please give us a call and as Mike suggested, the next quarter should be quite newsworthy, as it relates to not only the rebids that are outstanding, but the situation in Texas and how we go through our contract cycle. So we are on the roads on this summer and happy to touch base with anyone individually. Again, thank you very much.

This concludes the presentation for today, ladies and gentlemen, you may now disconnect. Have a wonderful day.