Providence Service Corporation Releases Fourth Quarter and Audited Year End 2008 Results

Impairment Analysis Complete; Increases First Quarter 2009 Earnings Guidance to a Minimum of $0.25 per diluted share

TUCSON, Ariz., March 27 /PRNewswire-FirstCall/ -- The Providence Service Corporation (Nasdaq: PRSC) today announced results for the fourth quarter and calendar year ended December 31, 2008. Included in the results is a fourth quarter non-cash $28.9 million asset impairment charge related to the Company's intangible assets, which, when added to the $141.0 million non-cash interim asset impairment charge recorded by the Company during the third quarter of 2008, resulted in a total impairment of goodwill and other intangible assets of $169.9 million for the year, and a loss per share for the year of $12.42. The interim and annual impairment charges were triggered by a significant and sustained decline in the Company's market capitalization, as well as changes in the state payer spending environment, during the six months ended December 31, 2008. The non-cash impairment charge for 2008 reflects the magnitude of both the decline in the Company's market capitalization and the deterioration of the mergers and acquisitions market (which saw dramatically lower valuations for comparable companies sold) during that six-month period.

Fourth Quarter 2008 Results

For the fourth quarter of 2008, the Company reported revenue of $178.0 million, an increase of approximately 80% from $98.7 million for the comparable period in 2007. Revenue from Providence's social services segment grew to $81.4 million in the fourth quarter compared to $75.8 million in the prior year period while revenue from its non-emergency transportation (NET) services business, which the Company acquired in December 2007, totaled $96.6 million in the fourth quarter of 2008 compared to $22.9 million in the 2007 period.

The Company reported an operating loss of $32.3 million and a net loss of $22.0 million, or $1.74 per diluted share, in the quarter ended December 31, 2008. This includes the additional asset impairment charge of $28.9 million, which was in line with the Company's previously announced estimate. In addition, the Company recognized a $5.8 million expense for the vesting acceleration of all previously awarded and unvested stock options and restricted stock awards. By expensing these options and restricted stock awards in 2008 rather than in future periods (the vesting period is typically three years), the Company estimates that it will avoid recognizing approximately $3.1 million of stock-based compensation expense in 2009. In the quarter ended December 31, 2007, the Company reported operating income of $8.9 million and net income of $4.3 million, or $0.35 per diluted share.

Providence's direct client census was approximately 62,800 at December 31, 2008, up from approximately 52,600 at December 31, 2007 and 48,000 at September 30, 2008, and the Company had over six million individuals eligible to receive services under its NET contracts at December 31, 2008. The Company had 716 direct contracts at December 31, 2008 up from 638 at December 31, 2007.

Managed entity revenue, which represents revenue of the not-for-profit social services organizations the Company provides management and/or administrative services to in return for a negotiated management fee, decreased 5% to $57.0 million for the quarter ended December 31, 2008 from $59.9 million for the prior year period. The decrease in managed entity revenue from period to period was primarily attributable to the Company's acquisition and consolidation of substantially all of the assets in Illinois and Indiana of Camelot Community Care, Inc., a managed entity, on September 30, 2008. Managed entity revenue is presented to provide investors with an additional measure of the size of the operations under Providence's management or administration and can help investors understand trends in management fee revenue. Managed client census was approximately 24,500 at December 31, 2008 as compared to approximately 23,600 at December 31, 2007. Contracts of managed entities increased to 323 from 320 year over year.

Audited Full-Year 2008 Results

For the full year, revenue increased approximately 143% to $691.7 million from $285.2 million for the year ago period. Providence's social services segment grew 18.4% to $310.6 million with the NET service revenue comprising the remaining $381.1 million. Revenue of managed entities was $242.9 million and $225.0 million for 2008 and 2007, respectively. The Company reported an operating loss of $149.3 million for 2008, which includes the non-cash asset impairment charge of $169.9 million, compared to operating income of $25.7 million for 2007. The Company reported a net loss of $155.6 million, or $12.42 per diluted share, for 2008 compared to net income of $14.4 million, or $1.19 per fully diluted share, for 2007. Excluding the impairment charge and the expense for accelerated vesting, EBITDA for 2008 would have increased to approximately $39.1 million from $30.7 million in 2007 (see reconciliation). The Company's recently amended credit agreement, which reset financial covenant targets for the fourth quarter of 2008 and all of 2009, utilizes EBITDA calculations in its covenant calculations and is expected to facilitate a full year of anticipated covenant coverage without taking into account any potential sale of assets or debt repayments during this period.

At December 31, 2008, the Company had cash and cash equivalents of $29.4 million. Net cash from operating activities during 2008 was $12.4 million. In addition, the Company repaid approximately $8.7 million of its long-term debt during the year.

"We are happy to have 2008 behind us," said Fletcher McCusker, Chairman and CEO. "Excluding the impairment and accelerated stock compensation, the Company reported substantial EBITDA of $39.1 million for the year and net cash from operations of approximately $12 million. Looking ahead, we are optimistic that 2009 will see a return to more historic growth as well as better budget visibility as states plan for the fiscal year that begins July 1, 2009."

Guidance

The Company anticipates revenue of between approximately $170.0 million and $180.0 million for the first quarter of 2009 and diluted earnings per share of at least $0.25, based on diluted shares outstanding in the first quarter of 2009 estimated at approximately 13.2 million (not including an additional approximately 1.6 million shares that would be deemed outstanding if the effect of the Company's $70 million convertible debt is considered dilutive). This is based on unaudited January and February results. Guidance for the first quarter of 2009 includes approximately $1.5 million in costs and expenses related to the amended credit agreement, including arrangement, legal, accounting and other expenses, as well as approximately $300,000 in legal and other fees related to the now abandoned consent solicitation. Guidance does not include any retroactive rate adjustments or revenue pickups from prior quarters, only contracted rates.

Mr. McCusker concluded, "In December, we began to see signs of volume improvements and January and February were extraordinarily strong months for us. Additionally, the cost cutting programs implemented last fall are starting to see real traction so margins are improving as well. Based on continued strength seen in March, we have confidence in our ability to report at least $0.25 in diluted earnings per share in the first quarter, even after an estimated $0.08 in one-time expenses."

Conference Call

Providence will hold a conference call to discuss its results and corporate developments on Monday, March 30, 2009 at 11:00 a.m. EDT (9:00 a.m. MDT and 8:00 a.m. Arizona and PDT). Interested parties are invited to listen to the call live over the Internet at http://investor.provcorp.com or http://www.earnings.com. The call is also available by dialing (888) 680-0865, or for international callers (617) 213-4853 and by using the passcode 13037270. Participants may pre-register for the call at https://www.theconferencingservice.com/prereg/key.process?key=PNFWPX49Y. Pre-registrants will be issued a pin number to use when dialing into the live call which will provide quick access to the conference by bypassing the operator upon connection.

A replay of the teleconference will be available on http://investor.provcorp.com and http://www.earnings.com. A replay will also be available until April 6, 2009 by dialing (888) 286-8010 or (617) 801-6888, and using passcode 43351992.

About Providence

Providence Service Corporation, through its owned and managed entities, provides home and community based social services and non-emergency transportation services management to government sponsored clients under programs such as welfare, juvenile justice, Medicaid and corrections. Providence does not own or operate beds, treatment facilities, hospitals or group homes, preferring to provide services in the client's own home or other community setting. The Company provides a range of services through its direct and managed entities to over 87,000 clients through 1,039 contracts at December 31, 2008, with an estimated 6.3 million individuals eligible to receive the Company's non-emergency transportation services related to its LogistiCare operations. Combined, the Company has a nearly $1 billion book of business including managed entities.

In addition to the financial results prepared in accordance with generally accepted accounting principles (GAAP) provided throughout this press release, the Company has provided adjusted EBITDA, a non-GAAP measurement, which presents its earnings on a pro forma basis excluding taxes, interest, depreciation and amortization, non-cash asset impairment charges related to Providence's goodwill and other intangible assets, and non-cash stock based compensation expense related to the acceleration of vesting of all unvested stock options and restricted stock awards as of December 30, 2008. Providence's management utilizes adjusted EBITDA as a means to measure operating performance. Details of the excluded items and a reconciliation of this non-GAAP financial measure to the most comparable GAAP financial measure are presented in a table below. The non-GAAP measure does not replace the presentation of our GAAP financial results. The Company has provided this supplemental non-GAAP information because the Company believes it provides meaningful comparisons of the results of Providence's operations for the periods presented in this press release. The non-GAAP measure is not in accordance with, or an alternative for, generally accepted accounting principles and may be different from pro forma measures used by other companies. The items excluded in the non-GAAP measure pertain to certain items that are considered to be material so that 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.

Certain statements herein, such as any statements about Providence's confidence or strategies or its expectations about revenues, results of operations, profitability, earnings per share, contracts, collections, award of contracts, acquisitions and related growth, growth resulting from initiatives in certain states, effective tax rate or market opportunities, constitute "forward-looking statements" within the meaning of the private Securities Litigation Reform Act of 1995. Such forward-looking statements involve a number of known and unknown risks, uncertainties and other factors which may cause Providence's actual results or achievements to be materially different from those expressed or implied by such forward-looking statements. These factors include, but are not limited to, reliance on government-funded contracts, risks associated with government contracting, risks involved in managing government business, legislative or policy changes, challenges resulting from growth or acquisitions, adverse media and legal, economic and other risks detailed in Providence's filings with the Securities and Exchange Commission, including its latest Form 10-K. Words such as "believe," "demonstrate," "expect," "estimate," "anticipate," "should" and "likely" and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on those forward-looking statements, which speak only as of the date the statement was made. Providence undertakes no obligation to update any forward-looking statement contained herein.

                             --financial tables to follow--

                          The Providence Service Corporation
                        Consolidated Statements of Operations
                   (in thousands except share and per share data)

                                    Three months ended        Year ended
                                        December 31,          December 31,
                                      2008       2007       2008       2007
    Revenues:
      Home and community based
       services                     $67,068    $63,355   $258,003   $216,583
      Foster care services           10,331      7,103     32,343     25,648
      Management fees                 4,012      5,340     20,217     20,069
      Non-emergency transportation
       services                      96,572     22,867    381,107     22,867
                                    177,983     98,665    691,670    285,167

    Operating expenses:
      Client service expense         70,456     59,313    253,652    204,021
      Cost of non-emergency
       transportation services       91,414     19,570    356,271     19,570
      General and administrative
       expense                       16,441      9,091     48,412     30,875
      Asset impairment charge        28,930         -     169,930          -
      Depreciation and amortization   3,062      1,787     12,722      4,989
    Total operating expenses        210,303     89,761    840,987    259,455
    Operating (loss) income         (32,320)     8,904   (149,317)    25,712

    Other (income) expense:
      Interest expense                4,668      2,259     19,578      3,071
      Interest income                  (169)      (492)      (979)    (1,470)
    (Loss) income before income
     taxes                          (36,819)     7,137   (167,916)    24,111
    (Benefit) provision for income
     taxes                          (14,866)     2,842    (12,311)     9,722
    Net (loss) income              $(21,953)    $4,295  $(155,605)   $14,389

    (Loss) earnings per share:
      Basic                          $(1.74)     $0.35    $(12.42)     $1.21
      Diluted                        $(1.74)     $0.35    $(12.42)     $1.19

    Weighted-average number of
     common shares outstanding:
      Basic                      12,600,346 12,197,284 12,531,869 11,865,402
      Diluted                    12,600,346 12,417,956 12,531,869 12,047,121




                          The Providence Service Corporation
                              Consolidated Balance Sheets
                     (in thousands except share and per share data)

                                                           December 31,
                                                         2008        2007
    Assets
    Current assets:
      Cash and cash equivalents                         $29,364     $35,379
      Accounts receivable-billed, net of allowance of
       $3.4 million in 2008 and $2.6 million in 2007     72,617      65,852
      Accounts receivable - unbilled                        424       2,250
      Management fee receivable                           7,703      10,166
      Other receivables                                   3,149       2,524
      Notes receivable                                      468         563
      Notes receivable from related party                     -       1,734
      Restricted cash                                     7,804       8,842
      Prepaid expenses and other                         15,378       9,554
      Deferred tax assets                                 4,757       5,094
    Total current assets                                141,664     141,958
    Property and equipment, net                          11,983      11,562
    Notes receivable, less current portion                  132         880
    Goodwill                                            112,770     280,710
    Intangible assets, net                               81,556      98,254
    Restricted cash, less current portion                 5,207       6,461
    Other assets                                         12,351      12,158
    Total assets                                       $365,663    $551,983
    Liabilities and stockholders' equity
    Current liabilities:
      Current portion of long-term obligations          $14,265      $8,950
      Accounts payable                                    3,005      14,035
      Accrued expenses                                   27,233      36,448
      Accrued transportation costs                       32,051      24,576
      Deferred revenue                                    3,375       4,062
      Current portion of interest rate swap               1,431           -
      Reinsurance liability reserve                       8,847       8,344
    Total current liabilities                            90,207      96,415
    Long-term obligations, less current portion         223,494     236,469
    Other long-term liabilities                           3,975         190
    Deferred tax liabilities                             10,096      30,600
    Total liabilities                                   327,772     363,674
    Non-controlling interest                              7,266       7,649
    Commitments and contingencies
    Stockholders' equity:
        Common stock:  Authorized 40,000,000 shares;
         $0.001 par value; 13,462,356 and 12,756,392
         issued and outstanding (including treasury
         shares)                                             13          13
      Additional paid-in capital                        169,699     159,177
      Common stock subscription receivable                    -        (715)
      Retained (deficit) earnings                      (123,254)     32,351
      Accumulated other comprehensive (loss) income,
       net of tax                                        (4,449)      1,093
                                                         42,009     191,919
      Less 619,768 and 612,026 treasury shares, at cost  11,384      11,259
    Total stockholders' equity                           30,625     180,660
    Total liabilities and stockholders' equity         $365,663    $551,983




                          The Providence Service Corporation
                        Consolidated Statements of Cash Flows
                                    (in thousands)

                                                             Year ended
                                                            December 31,
                                                         2008          2007
    Operating activities
    Net (loss) income                                 $(155,605)     $14,389
    Adjustments to reconcile net (loss) income to
     net cash provided by operating activities:
      Depreciation                                        4,505        1,578
      Amortization                                        8,216        3,411
      Amortization of deferred financing costs            2,698          291
      Provision for doubtful accounts                     4,084          702
      Deferred income taxes                             (14,553)        (502)
      Stock based compensation                            8,760        2,407
      Excess tax benefit upon exercise of stock options    (185)        (680)
      Asset impairment charge                           169,930            -
      Other                                                  28          100
      Changes in operating assets and liabilities, net
       of effects of acquisitions:
        Billed and unbilled accounts receivable, net     (9,277)        (945)
        Management fee receivable                        (2,364)      (3,595)
        Other receivable                                   (417)        (157)
        Restricted cash                                    (214)           -
        Reinsurance liability reserve                     2,621        1,166
        Prepaid expenses and other                       (5,828)        (823)
        Accounts payable and accrued expenses            (6,681)       9,146
        Accrued transportation costs                      7,475       (6,293)
        Deferred revenue                                   (702)      (1,991)
        Other long-term liabilities                        (105)           -
    Net cash provided by operating activities            12,386       18,204
    Investing activities
    Purchase of property and equipment, net              (4,664)      (1,949)
    Acquisition of businesses, net of cash acquired      (3,597)    (233,877)
    Acquisition of management agreement                    (418)           -
    Acquisition earn out payments                        (6,671)      (8,299)
    Restricted cash for contract performance              2,506       (1,287)
    Purchase of short-term investments, net                (186)        (320)
    Advances to related parties                               -       (2,534)
    Collection of notes receivable                        3,292          685
    Net cash used in investing activities                (9,738)    (247,581)
    Financing activities
    Repurchase of common stock, for treasury               (125)     (10,960)
    Proceeds from common stock issued pursuant to
      stock option exercise                                 469        2,363
    Excess tax benefit upon exercise of stock options       185          680
    Proceeds from long-term debt                              -      243,000
    Repayment of long-term debt                          (8,650)        (332)
    Debt financing costs                                    (89)     (10,888)
    Capital lease payments                                   (1)           -
    Net cash (used in) provided by financing activities  (8,211)     223,863
    Effect of exchange rate changes on cash                (452)         190
    Net change in cash                                   (6,015)      (5,324)
    Cash at beginning of period                          35,379       40,703
    Cash at end of period                               $29,364      $35,379



                          The Providence Service Corporation
                     Reconciliation of Non-GAAP Financial Measures
                                  Adjusted EBITDA
                                   (in thousands)

                                                          2008       2007

    Adjusted EBITDA                                     $39,088    $30,701

    Subtract:
    Interest expense (income), net                       18,599      1,601
    Income taxes                                        (12,311)     9,722
    Depreciation and amortization                        12,722      4,989
    Impairment charge (A)                               169,930          -
    Acceleration of stock based compensation (B)          5,753          -

    Net income (loss)                                 $(155,605)   $14,389

    (A)   Due to the significant and sustained decline in the Company's
          market capitalization and the uncertainty in the state payer
          environment as well as the impact of related budgetary decisions
          on the Company's earnings during the six months ended December 31,
          2008, the Company recorded asset impairment charges totaling
          approximately $169.9 million related to its goodwill and other
          intangible assets for the year ended December 31, 2008.
    (B)   On December 30, 2008, the Compensation Committee of the Company's
          Board of Directors approved the acceleration of the vesting dates
          of all unvested stock options and restricted stock previously
          awarded to eligible employees, directors and consultants, including
          stock options and restricted stock granted to executive officers and
          non-employee directors, under the Company's 2006 Long-Term Incentive
          Plan, effective on that day. In approving this vesting acceleration,
          the Compensation Committee considered, among other things, the
          anticipated boost to employee moral expected to result from such
          action and that such acceleration would eliminate the Company's
          recognition of any stock compensation expense with respect to these
          options and awards in future periods.

SOURCE Providence Service Corporation