America Service Group Inc. (NASDAQ:ASGR):
Second Quarter Highlights:
- Increase in gross margin from continuing contracts to 8.4% of healthcare revenues in the quarter, from 7.5% in the prior year quarter;
- Increase in Adjusted EBITDA to $5.7 million in the quarter, from $5.0 million in the prior year quarter;
- Increase in income from continuing operations before taxes to $3.6 million in the quarter from $3.2 million in the prior year quarter;
- Increase in guidance for full year 2010 pro forma net income to $11.5 million;
- Declared regular quarterly dividend of $0.06 per diluted share for the third quarter 2010;
- Days sales outstanding in accounts receivable of 27 days at June 30, 2010;
- Cash and cash equivalents of $29.7 million at June 30, 2010; and
- No debt outstanding at June 30, 2010.
America Service Group Inc. (NASDAQ:ASGR) announced today results for the second quarter ended June 30, 2010, and increased its guidance for full year 2010 pro forma net income.
Commenting on today's announcement, Richard Hallworth, president and chief executive officer of America Service Group, said, "Through the first six months, our company has outperformed our internal expectations. Based upon our second quarter results, we are pleased to again raise pro forma net income guidance for 2010 to reflect the continued strong underlying performance of our continuing contracts. Despite significant expected uses of cash this quarter, we achieved a very solid cash balance by quarter end and our days sales outstanding in accounts receivable continue at historically low levels. The pipeline of potential new business opportunities remains very robust although the timing of several key opportunities lags original expectations."
Income Statement Presentation Format as a Result of United States Generally Accepted Accounting Principles ("GAAP") Related to Discontinued Operations
As noted in its 2009 annual report on Form 10-K, the Company is applying the discontinued operations provisions of GAAP to all service contracts that expire subsequent to January 1, 2002. In accordance with GAAP, the results of operations of contracts that expire, less applicable income taxes are classified on the Company's consolidated statements of operations separately from continuing operations. The presentation prescribed for discontinued operations requires the collapsing of healthcare revenues and expenses, as well as other specifically identifiable costs, into the income or loss from discontinued operations, net of taxes. Items such as indirect selling, general and administrative expenses or interest expense cannot be allocated to expired contracts. The GAAP accounting presentation as it relates to discontinued operations and the Company's expired contracts has no impact on net income, earnings per share, total cash flows or stockholders' equity.
As a result of the application of GAAP related to discontinued operations, "healthcare revenues" and "healthcare expenses" on the Company's consolidated statements of operations for any period presented will only include revenues and expenses from continuing contracts. The Company will also discuss "Total Revenues," "Total Healthcare Expenses," and "Total Gross Margin," which will include all of the Company's revenues and healthcare expenses for a period (i.e., healthcare revenues plus revenues from expired service contracts, or healthcare expenses plus expenses from expired contracts less share-based compensation expense). Total Gross Margin is defined as Total Revenues less Total Healthcare Expenses. Total Gross Margin excludes share-based compensation expense. Reconciliations of healthcare revenues to Total Revenues, healthcare expenses to Total Healthcare Expenses and gross margin to Total Gross Margin are found in the attached schedules.
Results for Second Quarter and Six Months Ended June 30, 2010
Healthcare revenues from continuing contracts for the second quarter of 2010 were $156.2 million, an increase of 2.4% over the prior year quarter. Healthcare revenues from continuing contracts for the six months ended June 30, 2010, were $318.0 million, an increase of 15.1% over the prior year period. Total Revenues, which include revenues from continuing and discontinued contracts, for the second quarter of 2010 were $157.1 million, a decrease of 1.0% from the prior year quarter. Total Revenues for the six months ended June 30, 2010, were $321.2 million, an increase of 10.9% from the prior year period. The increase in both healthcare revenues from continuing contracts as well as Total Revenues from the prior year six months ended June 30, 2009, is primarily due to the commencement of services on April 1, 2009, under the Company's contract with the State of Michigan Department of Corrections.
Healthcare expenses from continuing contracts for the second quarter of 2010 were $143.2 million, or 91.6% of healthcare revenues, as compared with $141.1 million, or 92.5% of healthcare revenues, in the prior year quarter. Healthcare expenses from continuing contracts for the six months ended June 30, 2010, were $289.6 million, or 91.1% of healthcare revenues, as compared with $256.0 million, or 92.6% of healthcare revenues, in the prior year period. Healthcare expenses have been negatively impacted by adverse reserve development related to pre-2010 professional liability claims of $1.8 million and $2.3 million in the second quarter and the six months ended June 30, 2010, respectively. The 2010 amounts compare with $3.0 million and $5.4 million of adverse reserve development in the second quarter and six months ended June 30, 2009, respectively. Total Healthcare Expenses, which include expenses from continuing and discontinued contracts but excludes share-based compensation expense, for the second quarter of 2010 were $144.1 million, or 91.7% of Total Revenues, as compared with $146.8 million, or 92.5% of Total Revenues, in the prior year quarter. Total Healthcare Expenses for the six months ended June 30, 2010, were $292.9 million, or 91.2% of Total Revenues, as compared with $268.4 million, or 92.7% of Total Revenues, in the prior year period. The increase in both healthcare expenses from continuing contracts as well as Total Healthcare Expenses from the prior year six months ended June 30, 2009, is primarily due to the commencement of services on April 1, 2009, under the Company's contract with the State of Michigan Department of Corrections.
Gross margin from continuing contracts for the second quarter of 2010 was $13.1 million, or 8.4% of healthcare revenues, as compared with $11.4 million, or 7.5% of healthcare revenues, in the prior year quarter. Gross margin from continuing contracts for the six months ended June 30, 2010, was $28.4 million, or 8.9% of healthcare revenues, as compared with $20.3 million, or 7.4% of healthcare revenues, in the prior year period. Total Gross Margin, which includes continuing and discontinued contracts and excludes share-based compensation expense, for the second quarter of 2010 was $13.0 million, or 8.3% of Total Revenues, as compared with $11.9 million, or 7.5% of Total Revenues, in the prior year quarter. Total Gross Margin for the six months ended June 30, 2010, was $28.2 million, or 8.8% of Total Revenues, as compared with $21.2 million, or 7.3% of Total Revenues, in the prior year period.
Selling, general and administrative expenses for the second quarter of 2010 were $8.2 million, or 5.3% of healthcare revenues, as compared with $7.4 million, or 4.9% of healthcare revenues, in the prior year quarter. Selling, general and administrative expenses for the six months ended June 30, 2010, were $17.0 million, or 5.3% of healthcare revenues, as compared with $14.7 million, or 5.3% of healthcare revenues, in the prior year period. Included in selling, general and administrative expenses is accrued bonus expense related to the Company's 2010 incentive compensation plan of $258,000 and $1.8 million in the second quarter and six months ended June 30, 2010, respectively, compared with $830,000 and $1.4 million of accrued bonus expense in the prior year quarter and six months ended June 30, 2009, respectively, related to the Company's 2009 incentive compensation plan. Also, included in selling, general and administrative expenses is share-based compensation expense of $929,000 and $1.3 million in the second quarter and six months ended June 30, 2010, respectively, compared with $435,000 and $889,000 of share-based compensation expense for the second quarter and six months ended June 30, 2009, respectively. Included in the second quarter and six months ended June 30, 2010, share-based compensation expense is approximately $498,000 related to the accelerated vesting of restricted shares that were issued in the first quarter of 2009, due to the achievement of a specified target for the average closing share price of the Company's common stock. This target was set at an approximate 56% appreciation in share price from the closing share price on March 9, 2009, the time of the initial grant of the restricted shares. Selling, general and administrative expenses, excluding share-based compensation expense, as a percentage of Total Revenues for the second quarter of 2010 were 4.6%, as compared with 4.4% in the prior year quarter. Selling, general and administrative expenses, excluding share-based compensation expense, as a percentage of Total Revenues for the six months ended June 30, 2010, were 4.9%, as compared with 4.8% in the prior year period.
Expenses related to the Company's Audit Committee investigation into certain matters at Secure Pharmacy Plus, LLC, the findings of which were reported in March 2006, for the quarters ended June 30, 2010 and 2009, were $203,000 and $120,000, respectively, and for the six months ended June 30, 2010 and 2009, were $356,000 and $133,000, respectively. The expenses incurred in the quarter and six months ended June 30, 2010, are primarily due to legal expenses incurred as part of the Company reaching a settlement in principle on February 19, 2010, regarding the shareholder litigation filed against the Company and certain individual defendants on April 6, 2006, and related litigation filed by the Company against one of its insurance carriers discussed below.
The settlement regarding the shareholder litigation, which has received preliminary Court approval, is subject to final approval by the Court and provides for payment by the Company of $10.5 million and issuance by the Company of 300,000 shares of common stock and would lead to a dismissal with prejudice of all claims against all defendants in the litigation. The $10.5 million cash component of the settlement was paid by the Company to the escrow agent appointed by the Court during the second quarter of 2010. The preliminary total value of the settlement, based upon the Company's closing share price for its common stock of $15.42 per share on February 19, 2010, was approximately $15.1 million. The final value of the settlement will be determined based upon the Company's closing share price at the time of final approval of the settlement by the Court. The settlement provides for price protection to the plaintiffs in the event the closing share price is below $14.65 per share at the time of final approval of the settlement by the Court. In such event, the Company would pay in cash the difference between the share value at the time of final approval and $14.65 per share.
In addition to its primary directors and officers liability ("D&O") insurance carrier, with which the Company has settled all claims, the Company also maintains D&O insurance with an excess D&O carrier that provides for additional coverage of up to $5.0 million for losses in excess of $10.0 million. To date, the excess D&O carrier has denied coverage of this matter. After failing to reach agreement with the excess D&O carrier concerning the amount of their contribution to the settlement, the Company filed suit against the excess D&O carrier in the second quarter of 2010.
Corporate restructuring expenses related to management transitional changes previously disclosed by the Company on June 21, 2010, were $311,000 in the second quarter of 2010. There were no corporate restructuring expenses in the second quarter of 2009.