ModivCare Inc (MODV) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2013 Providence Service Corporation earnings conference call. My name is Dave, I will be your operator for today.

(Operator Instructions)

As a reminder, the call is being recorded for replay purposes. I would now like to turn the call over to Alison Ziegler of Cameron Associates. Please proceed, ma'am.

Thanks, Dave. Good morning, everyone, and thank you for joining us this morning for Providence's conference call and webcast to discuss financial results for the fourth quarter and year ended December 31, 2013. The press release was issued yesterday after the market closed.

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 20. The replay number is 888-286-8010 with the pass code of 53482011.

This call is also being webcast live with a replay available. To access the webcast, go to www.provcorp.com and look under the Investor tab, as well as the event calendar.

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 may make projections or other forward-looking statements regarding future events or the Company's beliefs about its financial results for 2014 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 recent filings with the SEC, including the Company's 10-K for the year ended December 31, 2013 which will be filed on Friday. The Company's forward-looking statements are dynamic and subject to change, therefore these statements speak only as of the date of this webcast, March 12, 2014. The Company may choose from time to time to provide updates, and if they do will disseminate them to the [investment public].

In addition to the financial results prepared in accordance with Generally Accepted Accounting Principles stated in the press release and provided throughout our call today, the Company also provided EBITDA and adjusted EBITDA non-GAAP measurements, which present its earnings on a pro forma basis. Providence's management utilizes these non-GAAP measurements as a means to measure overall operating performance, and to better compare current operating results with other companies within its industry. Both EBITDA and adjusted EBITDA are measurements not determined in accordance with or an alternative for Generally Accepted Accounting Principles, and may be different from pro forma measures used by some companies.

A definition, calculation, and reconciliation to the financial statements of each can be found in our press release. The items included in the non-GAAP measures pertain to certain items that are considered to be material, so the exclusion of the items would in management's belief, enhance a reader's ability to compare the results of the Company's business after excluding these items.

I now would like to turn the call over to Warren Rustand, Chief Executive Officer. Go ahead, Warren.

Thank you, Allison, and good morning. After our scripted remarks, we will be available to take your questions.

With us today on the call, we have Bob Wilson, our CFO; Herman Schwarz, CEO LogistiCare; and Craig Norris, CEO of Human Services division. We finished 2013 with favorable financial results which included revenue of over $1.1 billion, net income of $19.4 million, and cash generated from operations of over $55 million.

As Herman will discuss in more detail, while NET services revenue was pressured in the second half of the year by the transition of Connecticut from an at-risk to administrative services only contract, as well as our decision to walk away from certain underperforming contracts, our NET segment benefited from 2012's start-up efforts, expanded business, and negotiated favorable rate adjustment. Despite the limited growth on the top line, we saw improvement in the NET gross margin, and solid growth on the bottom line.

Our Human Service segment continued to experience revenue growth in the fourth quarter due primarily to a new workforce development contract, and a new foster care contract that began in September 2013, although transition costs in Texas and weather disruptions pressured margins in the quarter, as did the continued transition of certain states to the managed-care environment. We are pleased to report a 9% increase in clients in the Human Service segment in 2013, with gains across the board.

We continue to strengthen our management team in alignment with our commitment to increase shareholder returns and further improve our operational efficiencies. Most recently we brought on Michael-Bryant Hicks, Senior Vice President, General Counsel; [Justina Sanchez-Uzzell], Chief People Officer; and Michael Varadian, National Director of Healthcare Reform.

Entering 2014, we are in a much stronger operating position, are hopeful we will benefit from current healthcare trends including the Affordable Care Act and increased Medicaid enrollment, the trend toward home and community-based care, and the industry-wide focus on reduction in total cost to care. While some 26 states, plus the District of Columbia are currently moving towards expansion, there are still uncertainties at the state level as to how many and when. In our NET division, 11 of the states where we cover Medicaid lives are participating in the expansion, New Jersey being the most notable and the largest of those contracts.

On the Human Services side, where we would expect to benefit more gradually from enrollment, Arizona and California are two of our largest states that are participating, with several other states anticipating to opt in as well. Until the states are able to give us more clarity in projections, we will continue to be cautious about projecting the impact of this population on our business. We are in communication with the leadership of multiple states, and continue to monitor changes in the Medicaid population.

While it is still early to predict the impact to our business thus far, we are seeing minor Medicaid increases come into the NET segment. But it is too early to see any impact on the Human Services segment.

During 2014, we are directing attention to expanding our operating segments through both organic and acquisitive growth, with a specific focus on growing our home and community-based services and foster care services, while reducing our involvement in managed fee service arrangements in our Human Services segment. On our NET services segment, we will be focused primarily on organic growth related to the Medicaid expansion, as well as continuing to assess acquisition opportunities.

Supporting this growth is our solid cash flow, strong balance sheet, and excellent debt capacity. This should serve us well, as we continue to position the Company for the future.

Let me now turn the call over to Bob Wilson, our CFO, who will provide more detail on the third quarter results reported in our press release.

Thank you, Warren. Revenue for the fourth quarter of 2013 was $276.8 million, a decrease of 3.4% from $286.5 million in the comparable period in the prior year. Revenue from our NET services segment declined 6.8% to $187.2 million in the fourth quarter from $200 million -- $200.8 million in the fourth quarter of the prior year.

Revenue from the Human Services segment grew 4.6% to $89.6 million, compared to $85.7 million in the fourth quarter of 2012. Craig Norris and Herman Schwarz of our Human Services and NET business segments will provide more details around this in a moment.

We had net income of $3.4 million or $0.24 per diluted share in the fourth quarter of 2013, compared to net income of $2.9 million or $0.22 per diluted share in the fourth quarter of 2012. EBITDA for the fourth quarter of 2013 was $9.8 million, compared to $12 million in the same period last year. Adjusted EBITDA for the fourth quarter of 2013 was $11.1 million, compared to $13.3 million in the same period of last year.

Impacting the fourth quarter of both 2013 and 2012 were charges of approximately $1.3 million, net of stock-based compensation forfeitures related to the separation of certain former executives, which is included as one of the add-back items for adjusted EBITDA. EBITDA margin decreased to 3.5% in the fourth quarter of 2013, from 4.2% in the fourth quarter of 2012.

For the full year of 2013, we had total revenues of $1.123 billion, a slight increase of 1.5% from $1.106 billion for the full year of 2012. Revenue related to our NET services segment grew 2.6% for the year, from $750.7 million in 2012, to $770.2 million in 2013. Revenue from the Human Services segment decreased [0.8]% to $352.4 million, down from $355.2 million for the full year 2012.

Net income for the full year was $19.4 million or $1.41 per diluted share, compared to net income in 2012 of $8.5 million or $0.64 per diluted share. EBITDA for 2013 was $53 million compared to $39.2 million in 2012. Adjusted EBITDA for 2013 was $55.3 million, compared to $43.6 million for 2012.

This represents a year over year increase of 26.8%. EBITDA margin also increased to 4.7% for 2013 from 3.5% for 2012. This represents progress towards achieving our stated goal over time of achieving EBITDA margins in the 6.5% range.

We realized efficiencies in our general and administrative and business support cost structure in 2013. G&A expenses as a percentage of revenues were 4.3% in 2013, compared to 4.8% in the prior year. We anticipate further improvements in 2014, and expect G&A expense levels to be in the range of 3.75% to 4% of revenues in 2014.

For 2013, our effective tax rate was approximately 37.7%, compared to 49.2% in 2012. Our 2013 effective tax rate was lower than the 40% to 42% rate we expected and previously communicated, primarily due to benefits received from the disqualifying dispositions of incentive stock options. As discussed in the third quarter, we experienced a significant amount of stock option exercises in 2013, because of the increase in our stock price during the year.

For 2014, we expect our effective tax rate to be between 40% and 41%. This rate does not consider any benefit from the disqualifying dispositions of incentive stock options. Any benefit we receive for such disqualifying dispositions would be recognized in the quarter in which the disqualifying dispositions occur.

We continue to generate strong cash flow from operations, $55.2 million in 2013, compared to $42.5 million in 2012. At December 31, 2013, we had unrestricted cash and cash equivalents of $99 million, compared to $91.1 million at September 30, and $55.9 million at the end of 2012. This strong cash flow from operations as well as a strong cash position, coupled with the borrowing capacity of approximately $142.3 million that we put in place in connection with our debt refinancing during 2013, significantly enhances our financial flexibility as we continue to focus on growing our operations.

I will now turn it over to Craig, to discuss the performance of the Human Services business for the quarter.

Thank you, Bob. For the fourth quarter our client census on the Human Service side was approximately 56,300 clients. This is up 9% or 4,700 clients from the prior-year quarter. These census gains were evident across many markets within the Human Service segment.

All clients are being served from 347 local offices in 24 states, the District of Columbia, and Canada. There are approximately 6,300 employees serving 504 contracts. The contract count for the segment was down year over year for the quarter, primarily driven by the funding changes in our in-home tutoring program under the No Child Left Behind Act which we have previously discussed.

Revenue for the quarter in the Human Services segment increased 5% to $89.6 million, from $85.7 million in the fourth quarter of 2012. This is primarily related to the impact of the new Workforce Development contract in Wisconsin and the ramp up of our Texas contract. We did experience areas of softness in the quarter, mostly related to the anticipated pressure from certain managed-care markets. ¶ Ultimately these markets will consolidate their provider networks, and this will benefit more sophisticated organizations and drive our organic census growth. In addition, as Warren mentioned, we did have some early weather impact in December in a number of markets in the Northeast and the mid-Atlantic regions, as well as continued delays in our Texas foster care contract. Our Wisconsin contract is now fully implemented, and we have had a solid performance in the quarter.

As of September 30, 2013 our Texas contract officially started transitioning over clients from the state system. We expect this client transfer to be complete by the end of Q1 of 2014.

This is the first of what will be numerous contracts in Texas. There are been some delays while we partner with the state to implement and operationalize certain aspects of the new system of care.

We are also in discussions with the state on various changes to the contract to improve the overall financial structure. We will continue to diligently partner with the state of Texas, so the system is effectively implemented and able to be replicated.

During 2014, we will direct our attention on expanding through both organic and acquisitive growth, with a specific focus on growing our home and community-based services and foster-care services, while reducing our involvement in management fee service arrangements. The pipeline is continuing to expand, and we are vetting a number of opportunities. We will continue to diligently evaluate these potential opportunities, and look to make strategic acquisitions in 2014, especially in markets that are continuing to consolidate their provider systems.

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

Thank you, Craig. Good morning, everyone. While our fourth quarter revenue for the NET division represents a 6.8% decline to the comparable period last year, the numbers do not accurately reflect the trends in the business. During the quarter, two-thirds of our operations experienced an increase in revenue as compared to last year, and half of these operations posted a greater than 10% increase. In spite of these strong performances, our overall revenue declined due to the transition of the Connecticut contract to an ASO structure, and our conscious decision to not bid on incumbent contracts in Wisconsin and Arkansas, because we could not get comfortable with the future economics of these programs.

The $187.2 million in fourth quarter revenue also represents a 2.5% decrease to the third quarter. The decline is primarily driven by the inclusion of one month of Wisconsin revenue in the third quarter, plus a negative fourth quarter revenue adjustment to account for a prior period overpayment by New York state. Despite the revenue decline, our gross margin in the quarter improved compared to last year, due to rate increases we experienced in several renewed contracts, and the elimination of the poorly performing Wisconsin contract.

Transportation expense in the fourth quarter was 77.4% of revenue, versus 78.7% last year. It did increase compared to last quarter, due to the New York overpayment adjustment.

This adjustment resulted from the state mistakenly including in our monthly payments, a population that was not eligible for the transportation benefit. We are managing transportation in 40 states, and have a census of 15.8 million eligible members, up from 15.1 million a year ago, but down from 60 million eligibles last quarter, primarily due to the adjusted membership in New York.

With respect to the sales pipeline, we are waiting on RFP awards in Texas. You will recall that the portion of the state not currently managed under the broker model was divided into 11 distinct regions to be bid on individually. The decisions were due March 1, but with the volume of paper to be considered, we alone submitted 120,000 pages in our bid submissions, it is not surprising that the state is behind schedule.

The West Virginia RFP that we discussed last quarter was pulled back by the state, as it wanted to change the scope of the program. That RFP has now been reissued, and is due in March. As we had anticipated in Maine, the state is not satisfied with the NET program in six regions managed by one of our competitors, and has issued an RFP due in March for those regions with a scheduled July 1 start.

In South Carolina and New Jersey, where we presently hold expiring statewide contracts, the Medicaid agencies are still working on RFPs for release. Both of these states have indicated a desire to extend our contract for some period of time, to allow the agencies the flexibility to complete the RFP and the bid process. We are also gearing up for a stretch of new business implementations over the next few months.

Our statewide contract in Rhode Island is scheduled to go live on May 1. So we are just starting the hiring of associates and initiating implementation process. We are also finally expecting the start of the dual eligible pilot programs in several states over the next two months. As a result of these programs, we expect revenue to increase in a few key states like California and Virginia, but the complexity of mixed Medicaid and Medicare benefits will likely suppress the initial margins in these programs.

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

Herman, thank you very much. Overall, we are pleased with the progress the Company made in 2013. The favorable trends we see in healthcare today continue to be opportunities for progress. We have enduring relationships with payers, clients and referral sources, geographic reach, breadth of services and experience, management of a defined population of provider networks, contract bidding infrastructure and managed care contracting experience.

We continue to believe that the impact of Medicaid expansion under the Affordable Care Act will create opportunities for us to serve a substantially larger population of currently under-served citizens. Beyond Medicaid expansion, general healthcare market trends which include growing awareness of the need to coordinate physical and behavioral healthcare services, and the importance of facilitated non-emergency access to preventive services, will also be opportunities for progress. With a strong cash position, coupled with increased financial capacity, we are pursuing growth-oriented initiatives and investments to further position our business for the future.

With that, we are happy to open the call to your questions, and look forward to talking with you.

(Operator Instructions)

This comes from the line of Bob Labick at CJS Securities. Please go ahead.

Good morning.

Good morning.

I guess, I want to start on the LogistiCare side. Thank you for the explanation as it relates to the New York state reversal. Could you give us maybe a little background on that? And I don't know if you can quantify the size for us, but if you could that would be great, and any impact that might have on your future margins going forward?

Sure, Bob. The background on it is, the state as true in all of our states, we get eligibility files which dictates how we get paid on a PMPM basis. And as it turns out, as New York went back and reviewed some of their payment files, they realized that they had included in the membership a population that is not eligible for transportation benefits. It is not the core Medicaid. It was a group likely to fit into the expansion population that New York was providing some benefits to, but transportation was not one of them. They had been paying us on that population. So in the fourth quarter, they came back to us and told us that they had found this error and that there was a mistake.

So we recognized that we needed to adjust for that, and we took a $1.5 million prior period adjustment in December, to account for what they are going to come back and ask us to repay. Going forward, that impact is going to be mitigated, because this population is part of the expansion population that New York will be moving into Medicaid. So over the course of 2014, they are planning to phase that membership into our program. So we are not quite sure how that is going to work yet, but it looks like we are going to be picking up 1/12 or maybe a little more each month of that population. So by the end of this year, any impact of that change will have gone away.

Okay, great. That's very helpful. And then, at the beginning of the call, Warren talked a little bit about the newly eligibles beginning to see that impact on the LogistiCare side. Can you -- we talk about this every call obviously, and I know you are very close -- so can you give us the latest update as to what states are thinking, and how it may ultimately impact you, and what the timing would be? Because I thought March, we should know more.

Wouldn't that be nice. (Laughter). I mean, basically as Warren mentioned, that we have 11 states that we currently provide services to Medicaid beneficiaries, that have indicated they are, a part of the expansion population. We are only seeing an impact of membership in three, maybe four of those states, New Jersey as he mentioned being the most significant. It happens to be our largest contract, it happens to also be where we are seeing probably the most significant impact on membership.

What we don't know and frankly, even at this point what the states aren't able to tell us, and has not -- have not designated it, is that actually expansion population? Or is it what they call the woodwork population, which are folks that are typically and have been eligible to be in the standard Medicaid program, but have just never registered or signed up. So we don't really know -- I can't really attribute whether the population growth we are seeing is just kind of basic Medicaid folks, or is it the expansion population? And the states don't -- and haven't been able to provide that information for us yet. It doesn't impact us one way or the other, in terms of how we get paid today. It might in the future. But right now, we are getting paid just based on our straight, current in-place PMPM. But I can't really tell you how much of it, again is expansion versus just growth in standard Medicaid. The states that we have seen an impact primarily, as I mentioned are New Jersey, Nevada, and a little bit in Delaware.

Okay, great. And I guess, we will continue to obviously stay tuned for that, as you learn and tell us on the calls.

Here is what it will tell you. I know you are seeing numbers coming out of the federal government, out of CMS, about all these people having signed up. That is not flowing necessarily into the state membership rolls as we have seen it. And what could be happening there, or what we think might be happening there is, if these are woodwork individuals, you have got to remember that if they are woodwork, then the states do have a financial responsibility at their split with CMS, whether that is somewhere between 50% and 70%. So the feds pay. So the states would have some financial risk associated with the woodwork population. So they are going to be fairly slow at pushing those folks through the registration process, and getting them eligible, because that is money out of their pockets, as opposed to the expansion population which is paid for 100% by the feds. Does that make sense?

Yes. It is very helpful color. Okay, great. And then, jumping over to Human Services real quick, could you help us understand the impact -- I guess, you had called out three things in the quarter that impacted margins. It was weather, the Texas start-up expenses, and then the continual transition to some NCOs. Maybe help us quantify each of those? And then more importantly, as we think about the near-term 2014, maybe 2015, give us a sense of where you can get margins back in that division? I know the long-term goal, I am sure is unchanged at the 6.5%.

Yes. Thanks, Bob. I think the three things I called out for the quarter probably were worth about 1.5 point or so on the margin. Weather, it has not been too typical in recent years, where we have had the kind of weather we had in early December. And, of course, that is a little bit challenging month, as you know because the second half is part of the month is school vacations and holidays. So that has an impact to us, pretty dramatically frankly, and when it happens in the beginning of December.

The managed care sides -- it is something that I have talked about before. I also might think it is going to be opportunity for us as I have said. But we have seen, for example -- one example I would give you, Bob, is like in North Carolina where part of what is going on there, is they had a number of managed-care providers there, and what they been doing over this past year is consolidating down to fewer. So as they consolidate, we have to adjust and adapt to the ones that survive that system, and we have to make our changes.

Now I think what we seeing in an environment, as an example like in North Carolina, is a lot of providers aren't adapting and adjusting. So I am still confident that once those areas stabilize, and whatever the state choose as their managed care provider, that we are going to benefit in those environments.

And then in Texas, as I said we started finally in September, bringing the clients over to our program. We are about done with that transfer of about 1,200 clients or so. And so, since this is the first contract, Bob, in Texas of this nature, I liken it to a little bit to sort of the LogistiCare contracts.

Once we have taken over this system, we have realized that the state's data wasn't all that perfect. We are working on that. Some of the administrative costs that the state assumed that we would need, it might be a little bit more, and we are dealing with some provider rate issues.

So there is about four or five things we are dealing with the state on, relative to the contract now that we are just about done transitioning those clients, and we will be going back with them. Kind of like -- in similar fashion that LogistiCare does with their large contracts to kind of right-size some of the financial components of the contract. So we are kind of in the middle of getting the final client count over, and dealing with the state on four or five issues relative to the contract.

That to your last question, what will help the margin improvement this year? Clearly, getting a Texas contract fully implemented, with certain changes of that contract should dramatically help improve the margins in that business, as well as some of the stabilizing managed care environments. While they are not all stable yet, some of them have become stable. And I think the other ones that are still sort of trying to find their grounding, I believe within the year they will sort of stabilize themselves as well.

So I think those are the big things. Weather, of course, we can't control whether. It is no big secret we have had some this year already. It affects both segments a little bit differently. But other than that, we should be looking at a fairly decent year if the weather can cooperate with us henceforth.

Bob, this is Warren. I think there is probably one additional comment that we would make, in regards to the margin. And that is the notion that we have launched a review of all of our business operations across the human services, as to their performance. And over time, we will need to reconcile and rationalize underperforming programs, in a way that either brings them to a higher level of performance, or we determine to do something else with them.

So it is necessary for us to continuously improve our current operations, as well as look at future opportunities and the margins that we get from them. So we would expect overall in 2014 to continue to attack the margin, and continue to try and improve the margin through a variety of activities, taken care of here at corporate.

Okay. That's fantastic. My last question, and I will go back into queue.

Just you had mentioned -- obviously, with Texas you are going at it 100%, doing everything you can, because there are multiple additional opportunities ahead, and you have to get this just right, so you have the opportunity to win those. Can you give us just any timing on when any other contracts or regions in Texas might become available?

Yes, Bob. They have awarded another region within the last 60 days I want to say. We didn't bid on that region. We thought it was the appropriate thing to do, to kind the right-size of the current contract, get it stable, get sort of the parameters of the contract. So they have awarded one other region. They did bid it out to a not-for-profit.

I think they kind of wanted to do a comparison, between what we might bring to it, and what a not-for-profit might bring to it, which is fine. And I suspect sometime by this summer, they will come out with their third region in that state for this contract.

Great. Thank you very much.

Thank you, Bob.

The next question comes the line of Brian Hoffman at Avondale Partners. Go ahead, please.

Hello, thanks for taking the questions. First of all, the $1.5 million adjustment from the overpayment, can you give us a per share impact on that?

This is Bob Wilson. Yes, the per share impact would be about $0.06 in the fourth quarter. So our earnings per share would have been rather than $0.22 -- it would have been

$0.24

$0.24. It would have been $0.30.

Okay, great. Thank you. And then, you briefly mentioned this, but can you give us a bit more color about the impact of reform that you are seeing in Q1, specifically as it relates to LogistiCare? Are you seeing increased enrollment, and for that expansion population are states paying the previous PMPM rates, or are they paying different rates for that population?

I mean, I will answer that, from LogistiCare, as I mentioned in response to Bob. We are seeing it in a handful of states, probably about three or four states. We are seeing some membership growth -- again, we can't distinguish whether it is part of the expansion population or part of that woodwork phenomenon that we have discussed. But we do -- regardless of that, we do get paid at the same existing PMPM we came out of 2013 with.

The difference would be, if they are traditional Medicaid type members, their utilization might be higher than what we would expect from the expansion population, and it is frankly, too early to tell yet whether or not that is the case. So I would anticipate that as we get further into 2014, and more of these states are signing up folks and pushing harder, and the exchanges are working better, we will have a better sense. But at this point, the states can't tell us who is an expansion member versus woodwork, and we are not sure that they will be able to, in terms of our files. They obviously have to be able to tell that for themselves, in order to get reimbursed by the feds at 100%. But they are not at this point, including that in our eligibility files, because it doesn't truly impact us.

Okay. Yes, sorry if I missed that before.

That's all right.

And then lastly, can you just give us some color, or tell me if you -- or your comfort level with being able to sustain the free cash flow levels from 2013 going forward?

Yes, this is Bob Wilson again. We are actually quite comfortable that we are going to be able to sustain and grow our free cash flow levels for this coming year. And we are not getting into the particulars of our budget process, but that is sort of the standard benchmark that we are using internally, and have every expectation of hitting it.

Great. That's it for me. Thank you.

Thank you, Brian.

Your next question comes from the line Mitra Ramgopal at Sidoti. Go ahead, please.

Yes, good morning. I am sorry if I missed some of the call and you might have answered these questions before. But first is it fair to say, that had it not been for the reserve, the margin in the NET segment would have been up actually year-over-year and sequentially?

It certainly would have been up year-over-year, and it would have been up as well in -- from Q3 to Q4 slightly up, yes.

Okay, thanks. And I don't know if you could give us an update as it relates to Michigan. I believe you are planning to by the end of the first quarter be adding about, I think 500,000 new lives. I don't know if you can give an update on where that stands?

Yes, I can. That -- all of -- excuse me -- all of that business has been implemented and is up and running, and running successfully. So our Michigan operation has expanded significantly, and is benefiting from some winter weather at the same time so. So far so good.

Again, I think you also had a couple of programs, NCO programs in California starting to core this year. I don't know if you can give us an update on how that is coming along?

Sure. The programs we had talked about in Q3 were, what they called the rural expansion for Medi-Cal. We have implemented those programs. We don't -- in those two cases, we do not get paid on an at-risk basis or a capitated basis. They are cost plus.

So we do -- our revenue fluctuates with the usage of the program, the volume in the program, the actual trips being taken. And so far, they have not reached the levels that either our client or us expected, in terms of the utilization. So it hasn't generated the revenue levels that we expected. We continue to believe that it will, as the managed care organizations promote the program, and people get used to the fact that they are now part of a managed care network.

And then, the other piece of that, that we talked about is those dual eligible programs, which I mentioned earlier we do anticipate to start probably in April in California. And that would come on and generate revenue growth we are expecting.

Great, thanks. I have a question on -- (Multiple Speakers).

Let me just put a finer point on the question of margin, related to the adjustment that Herman responded to. So in the quarter, the impact of that adjustment was about 1 percentage point or 100 basis points on the operating margin of LogistiCare in the quarter. And, of course, and you would have sort of a proportionate effect on the full-year, probably about 3/10 of a percentage point on margin.

Okay, thanks. No, that's very helpful. And Warren, I know you talked about potential acquisitions. I don't know if you can sort of remind us, typically when you make an acquisition aside from the revenue benefit, are the margins of the acquired company similar to where you are at, or is there sort of room for improvement there to?

Well, there are two types of acquisitions. Mitra, thank you very much for the question. The one are the tuck-in acquisitions we talked about. We did two of those in the fourth quarter. As you know, we don't necessarily announces those kinds of acquisitions, but we did two during the fourth quarter. We have a robust pipeline, we continue to look at those.

We do have minimal standards though, however, as we look at new business and the acquisition whether they be tuck-ins or larger, and internal hurdle rates that we think we have to have. And so, as a result of that, we would look to acquire or assimilate those businesses which have a higher margin than we currently see in our business today, and would exceed the 6.5% that we are currently looking at. So we apply a higher standard to that new business that is coming to us, than we have in our existing business.

And you noticed, and Bob mentioned that we continue to improve our margin. In 2012, it was 3.5%, it moved in 2013 to 4.7%. We expect to have continued improvement in the margin in 2014.

Okay, now, thanks again. And a final question on the $1.3 million. Going forward at this point, I think is that issue is pretty much behind? I know it, a quarter you said a year ago also?

What is the $1.3 million you are referring to, Mitra?

The expense associated with the separation of some former officers?

Yes, that -- Mitra, this is Warren. That is a one-time expense, and we don't expect that to be repeated.

Okay. Thanks, again.

Thank you. Your next question is from the line of [Mike Hughes] at [SJS Capital]. Go ahead, please.

Good morning. Can you just talk about your two businesses, and the percentage of revenue from each business that is generated through a managed care versus directly through the states? And then the margin differential, when you are dealing with the managed care organization?

Well, Herman, I will start on my side. Just off the top of my head, I would say -- I would say about 60% of the Human Service side is presently in some form of managed care, Mike. I mean --

Okay.

And keep in mind, managed-care, it can have many different forms, from fully capitated to fee-for-service managed-care, so there many different varieties that can exist. I do expect that number as a percentage of revenue to continue to grow, as states look to be more sophisticated with how they are managing their systems -- their Medicaid system, such as fact of life as I have talked about before.

There is a period of adapting to those changes. But I think a company like ours will be in a good position, compared to the smaller not-for-profit kind of businesses out there that really, will have to spend quite a bit of resources to really adapt to the changing managed care environment. So ultimately I think that will be a good thing for us.

So the margin differential, I would say it is really -- there is not really a one answer I can give you Mike on that. There are some states where we been in managed-care for a long time, where we have seen our margin rise over time. There are managed-care programs that we have been in that have sort of suppressed margin for some time. And then, we have states that do the same thing.

So there is not really one answer I can give you one that, unfortunately. But I do believe over time, that as managed-care system sort of takes foot in these states, and as they consolidate their provider network, we generally do see our census grow. We became --we become an option for the managed care agencies, and a partner with them, and margins should stabilize. But there is not really one answer to that question, unfortunately.

And then on our side, we do -- between 21% and 22% of our revenue is with managed care organizations. And the gross margins, which would be the only comparable measure there, for the managed care is slightly, overall slightly better than the state gross margins, but just slightly.

Okay. And then, I think on the last call, or maybe the prior call, you talked about some technology spending maybe for electronic health records. Can you give us an update there, and kind of what that number will be for this year? How much will be capitalized, how much will be expensed through the income statement?

Sure. Well, we continue to invest in technology. We will continue to invest in technology in 2014. We are being very kind of cautious about the kind of pace of that spend. But we are -- clearly have a plan in place. We are clearly moving through common electronic health record across the organization, and have a step-wise approach to that, so that we don't sacrifice anything in terms of operational efficiency while we are making those changes.

Okay. So this --

This is Warren. Additionally, I would add that, in addition to what Bob has just said, we are going to invest in LogistiCAD, as well on the LogistiCare side to upgrade that. As you know, we have had a competitive advantage with LogistiCare for many years which is a home-grown system, and it is in need of refurbishment now. And so, as a result of that we are actually continuing to invest on the LogistiCare side, as well to hold that competitive advantage.

On the Human Services side, in addition to electronic health records we have a HRIS system we are looking at, we are improving and increasing our payroll capacity, and our ability to monitor, which creates efficiencies and drives our margin improvements. So there are whole host of electronic kinds of opportunities for us, on both Human Services and LogistiCare which we believe will help drive the margin.

Okay. But in the short-term, just for our modeling purposes, should we build in a little bit of a headwind from technology spending this year, or is it kind of consistent with what you spent in 2013?

No, it will be more than it was in 2013. Again, as Warren mentioned and Herman might have additional color on this, we clearly have built into our plans for 2014 on the LogistiCare side, a pretty substantial investment for upgrades, and, Herman again, might want to provide more color around that. Similarly on the Human Services side, even though we are being more deliberate in our approach, there will be some incremental investment in technology that we experience in 2014, compared to our current pace in 2013.

Knowing -- I mean, I want to be -- excuse me -- a little careful, because our upgrades are as Warren mentioned, are truly designed to kind of continue our competitive advantage and increase it. So I don't want to give away what we are necessarily doing at this point in time.

But Bob is correct. We are increasing our spend, and making some capital adjustments in our technology that we believe will give us an opportunity to extend the programs, and add value to the programs that we currently have, in order to maintain those contracts.

Okay. I appreciate what you are saying -- but just as far as getting the Street models correct, should we add an additional $500,000, $1 million related to tech expense that will flow through the income statement for 2014? What would be a good number?

A couple million would be a reasonable, I guess, for modeling purposes --

Okay.

I guess -- now let me back a second here. So a lot of that capital spend, all that technology spend is not necessarily CapEx in a GAAP accounting sense. Much of that is flowing through our income statement as accrued expense, just by the nature of the accounting rules, on both sides of the business, in fact I would say the lion's share.

My comment earlier was, that we expect on a free cash flow basis to do better than 2014 than we did in 2013. That takes into account that additional technology spend that is flowing through our income statement and through our free cash flow calculations

Okay. And then, just last question -- just good segue there. Your free cash flow was phenomenal last year. But in part, you were benefited by working capital. I think accounts payable and accrued were almost $19 million of benefit.

So would that repeat? I mean, you generated I think almost $3 a share in free cash flow. Are you suggesting that type of number for this year as well?

I am suggesting that our free cash flow, our plan, the budget that we are operating against, has free cash flow improving in 2014 compared to 2013.

Okay, great. Thank you very much.

Thanks. The next question is from the line of Mike Petusky at Noble Financial. Please proceed.

Hello, good morning. Bob, I was wondering if you could just talk about at the outset, it sounded like you expect a meaningful improvement on the G&A line, in terms of percentage of revenue. Can you just add any color to what you are doing there?

Well, I think a couple of things. We have -- there are certain elements of discretionary spend that we have looked very closely at, as we went through our budget process late in the year. In addition to that, we will continue to look at ways of consolidating our cost structure around business support functions. I mean, potentially literally consolidating some of our functions to achieve cost savings in that way as well. We have commented on that in earlier quarters.

I would say 2013 was the year that we plan -- we evaluated, we assessed, and we planned. 2014 is the year that we are going to execute. Some of that we will realize -- we will kind of realize that throughout 2014, probably the full impact of that will be felt in 2015 and beyond.

Okay. All right. Great. And then, Herman, could you remind me when some of the key renewals are actually term? And I am talking about, primarily New Jersey and South Carolina, but any other ones that I may be forgetting, when those actually term in 2014?

Sure. New Jersey is a -- scheduled by contract to be a June 30 expiration, but as I have indicated they are looking to extend that. South Carolina is May, and they have also indicated a desire to extend. We don't know how long yet in South Carolina. We have had some discussions of New Jersey around that, but until we sign something I would prefer not to talk about it.

But in both cases, we think it will get us probably through at least this year. And then the other ones we have, Pennsylvania I think has an option year starting in December that we would have. But those are the only two big ones that are actually expiring, that don't have option years available.

Okay, great. And then, forgive, but and especially if you have mentioned this earlier, but key RFPs you are bidding on here, over the next quarter or two?

Sure. As I mentioned, we are waiting on the Texas decision. So that one is already in the bank, and we are just waiting to see what happens. We are currently working on both West Virginia and Maine, in terms of state RFPs.

And then there are a couple of fairly large managed-care opportunities, but again I would rather not mention by name, because it may be that some of our competitors don't know that they are available. So those are probably the four things that are keeping us most of distracted right now, in terms of trying to get RFPs out the door.

Okay. Last question. Could you size the Maine opportunity?

Maine?

Yes, Maine.

Well, let me do it this way. I don't want to, because it is competitive bidding. Our region in Maine is around [5 million], and there are six regions up for bid. So if you want to use kind of a rule of thumb, you can do that multiplication. I am not saying it is all of that, or maybe not more than that, depending on the size of the regions, but that would give you at least a ballpark.

Fantastic. Thanks.

You have no further questions at this time.

(Operator Instructions)

There are no further questions for you, gentlemen. So I would now like to turn the call back to Mr. Warren Rustand for closing remarks.

Thank you very much, and thank you for all the questions that you have asked. We look forward to follow-up with you, as the desire, and will be available to you today and through the balance of the week, so that if you want to follow-up on any of these questions specifically, we would be glad to do that.

And just an additional comment, as we look back at 2013, and the assessment that we have made of the Company, the planning that we have had to do, the analysis that we have done, and now the ability to execute on that plan, and we are very encouraged and very excited about the opportunities for 2014.

And when we look back at 2013, with the margin improvement, the improvement in G&A, the acquisition pipeline developing, the cash generation, the refinancing of the Company, the technology investments. As we look at the scoreboard that is used by the internal management team to judge our progress, we feel like 2013 was a very good year.

We are looking forward to 2014, and we look forward to your questions as we go forward. We want to thank you for joining us on the call today. Have a good week.

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