Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
 
(Mark One)
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             
 
Commission File Number 001-34221
 
 

The Providence Service Corporation
(Exact name of registrant as specified in its charter)

 

Delaware
 
86-0845127
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
700 Canal Street, Third Floor
Stamford, Connecticut
 
06902
(Address of principal executive offices)
 
(Zip Code)
 
(203) 307-2800
(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    ☒  Yes    ☐  No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒  Yes   ☐   No
 

1



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐
Accelerated filer ☒
 
 
Non-accelerated filer ☐ (Do not check if a smaller reporting company)
Smaller reporting company ☐
 
 
Emerging growth company ☐
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ☐  Yes    ☒  No
 
As of November 3, 2017, there were outstanding 13,305,502 shares (excluding treasury shares of 3,944,171) of the registrant’s Common Stock, $0.001 par value per share.



2



TABLE OF CONTENTS
 
Page
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets – September 30, 2017 (unaudited) and December 31, 2016
 
 
 
 
Unaudited Condensed Consolidated Statements of Income – Three and nine months ended September 30, 2017 and 2016
 
 
 
 
Unaudited Condensed Consolidated Statements of Comprehensive Income – Three and nine months ended September 30, 2017 and 2016
 
 
 
 
Unaudited Condensed Consolidated Statements of Cash Flows – Nine months ended September 30, 2017 and 2016
 
 
 
 
Notes to the Unaudited Condensed Consolidated Financial Statements – September 30, 2017
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 1A.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



3



PART I—FINANCIAL INFORMATION
Item 1.   Financial Statements.
The Providence Service Corporation
Condensed Consolidated Balance Sheets
(in thousands except share and per share data)
 
September 30,
2017
 
December 31,
2016
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
92,178

 
$
72,262

Accounts receivable, net of allowance of $5,765 in 2017 and $5,901 in 2016
175,162

 
162,115

Other receivables
5,555

 
12,639

Prepaid expenses and other
39,083

 
37,895

Restricted cash
1,198

 
3,192

Total current assets
313,176

 
288,103

Property and equipment, net
48,191

 
46,220

Goodwill
121,555

 
119,624

Intangible assets, net
45,750

 
49,124

Equity investments
157,067

 
161,363

Other assets
12,911

 
8,397

Restricted cash, less current portion
5,902

 
10,938

Deferred tax asset
4,436

 
1,510

Total assets
$
708,988

 
$
685,279

Liabilities, redeemable convertible preferred stock and stockholders' equity
 
 
 
Current liabilities:
 
 
 
Current portion of long-term obligations
$
1,528

 
$
1,721

Accounts payable
19,921

 
22,177

Accrued expenses
103,397

 
102,381

Accrued transportation costs
101,195

 
72,356

Deferred revenue
17,421

 
20,522

Reinsurance and related liability reserves
4,881

 
8,639

Total current liabilities
248,343

 
227,796

Long-term obligations, less current portion
566

 
1,890

Other long-term liabilities
23,968

 
22,380

Deferred tax liabilities
54,363

 
57,973

Total liabilities
327,240

 
310,039

Commitments and contingencies (Note 11)

 

Redeemable convertible preferred stock
 
 
 
Convertible preferred stock, net: Authorized 10,000,000 shares; $0.001 par value; 803,232 and 803,398 issued and outstanding; 5.5%/8.5% dividend rate
77,549

 
77,565

Stockholders' equity
 
 
 
Common stock: Authorized 40,000,000 shares; $0.001 par value; 17,446,673 and 17,315,661 issued and outstanding (including treasury shares)
17

 
17

Additional paid-in capital
310,017

 
302,010

Retained earnings
167,004

 
156,718

Accumulated other comprehensive loss, net of tax
(26,331
)
 
(33,449
)
Treasury shares, at cost, 3,944,171 and 3,478,676 shares
(144,201
)
 
(125,201
)
Total Providence stockholders' equity
306,506

 
300,095

Noncontrolling interest
(2,307
)
 
(2,420
)
Total stockholders' equity
304,199

 
297,675

Total liabilities, redeemable convertible preferred stock and stockholders' equity
$
708,988

 
$
685,279

 
See accompanying notes to the unaudited condensed consolidated financial statements

4



The Providence Service Corporation
Unaudited Condensed Consolidated Statements of Income
(in thousands except share and per share data)
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Service revenue, net
$
409,517

 
$
412,271

 
$
1,216,994

 
$
1,192,426

 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Service expense
378,032

 
378,488

 
1,124,478

 
1,095,011

General and administrative expense
18,629

 
17,320

 
53,705

 
52,548

Depreciation and amortization
6,547

 
6,670

 
19,716

 
20,058

Total operating expenses
403,208

 
402,478

 
1,197,899

 
1,167,617

 
 
 
 
 
 
 
 
Operating income
6,309

 
9,793

 
19,095

 
24,809

 
 
 
 
 
 
 
 
Other expenses:
 
 
 
 
 
 
 
Interest expense, net
302

 
338

 
983

 
1,239

Equity in net (gain) loss of investees
460

 
1,517

 
991

 
5,693

Gain on sale of equity investment
(12,606
)
 

 
(12,606
)
 

Loss (gain) on foreign currency transactions
200

 
(482
)
 
600

 
(1,332
)
Income from continuing operations before income taxes
17,953

 
8,420

 
29,127

 
19,209

Provision for income taxes
2,989

 
4,678

 
8,391

 
12,466

Income from continuing operations, net of tax
14,964

 
3,742

 
20,736

 
6,743

Discontinued operations, net of tax
(16
)
 
(2,791
)
 
(6,000
)
 
332

Net income
14,948

 
951

 
14,736

 
7,075

Net loss (income) attributable to noncontrolling interests
(95
)
 
(301
)
 
(295
)
 
433

Net income attributable to Providence
$
14,853

 
$
650

 
$
14,441

 
$
7,508

 
 
 
 
 
 
 
 
Net income (loss) available to common stockholders (Note 9)
$
11,962

 
$
(745
)
 
$
8,927

 
$
3,697

 
 
 
 
 
 
 
 
Basic earnings (loss) per common share:
 
 
 
 
 
 
 
Continuing operations
$
0.88

 
$
0.14

 
$
1.10

 
$
0.23

Discontinued operations

 
(0.19
)
 
(0.44
)
 
0.02

Basic earnings (loss) per common share
$
0.88

 
$
(0.05
)
 
$
0.66

 
$
0.25

 
 
 
 
 
 
 
 
Diluted earnings (loss) per common share:
 
 
 
 
 
 
 
Continuing operations
$
0.88

 
$
0.14

 
$
1.09

 
$
0.23

Discontinued operations

 
(0.19
)
 
(0.44
)
 
0.02

Diluted earnings (loss) per common share
$
0.88

 
$
(0.05
)
 
$
0.65

 
$
0.25

 
 
 
 
 
 
 
 
Weighted-average number of common shares outstanding:
 
 
 
 
 
 
 
Basic
13,581,662

 
14,523,408

 
13,612,764

 
14,823,757

Diluted
13,655,554

 
14,634,483

 
13,676,468

 
14,943,024

 
See accompanying notes to the unaudited condensed consolidated financial statements


5



The Providence Service Corporation
Unaudited Condensed Consolidated Statements of Comprehensive Income
(in thousands)
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Net income
$
14,948

 
$
951

 
$
14,736

 
$
7,075

Net loss (income) attributable to noncontrolling interest
(95
)
 
(301
)
 
(295
)
 
433

Net income attributable to Providence
14,853

 
650

 
14,441

 
7,508

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of tax
2,165

 
(2,808
)
 
6,591

 
(11,140
)
Reclassification of translation loss realized upon sale of equity investment
527

 

 
527

 

Other comprehensive income (loss):
2,692

 
(2,808
)
 
7,118

 
(11,140
)
Comprehensive income (loss)
17,640

 
(1,857
)
 
21,854

 
(4,065
)
Comprehensive loss (income) attributable to noncontrolling interest
(26
)
 
(266
)
 
(113
)
 
378

Comprehensive income (loss) attributable to Providence
$
17,614

 
$
(2,123
)
 
$
21,741

 
$
(3,687
)
 



































See accompanying notes to the unaudited condensed consolidated financial statements

6



The Providence Service Corporation
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
 
Nine months ended September 30,
 
2017
 
2016
Operating activities
 
 
 
Net (loss) income
$
14,736

 
$
7,075

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation
13,802

 
17,039

Amortization
5,914

 
24,140

Provision for doubtful accounts
1,258

 
2,196

Stock-based compensation
4,586

 
3,204

Deferred income taxes
(7,062
)
 
(15,446
)
Amortization of deferred financing costs and debt discount
516

 
1,573

Equity in net loss of investees
991

 
5,693

Gain on sale of equity investment
(12,606
)
 

Other non-cash charges (credits)
555

 
(1,279
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(10,647
)
 
(22,116
)
Prepaid expenses and other
7,517

 
(9,900
)
Reinsurance and related liability reserve
(4,924
)
 
984

Accounts payable and accrued expenses
(3,407
)
 
32,530

Income taxes payable on sale of business

 
(30,153
)
Accrued transportation costs
28,839

 
31,935

Deferred revenue
(4,537
)
 
(7,460
)
Other long-term liabilities
1,399

 
5,242

Net cash provided by operating activities
36,930

 
45,257

Investing activities
 
 
 
Purchase of property and equipment
(15,293
)
 
(33,928
)
Net increase from short-term investments
300

 
242

Equity investments

 
(6,381
)
Cost method investments
(3,000
)
 

Loan to joint venture
(566
)
 

Repayment of loan from joint venture
576

 

Proceeds from sale of equity investment
15,823

 

Restricted cash for reinsured claims losses and other
7,029

 
4,917

Net cash provided by (used in) investing activities
4,869

 
(35,150
)
Financing activities
 
 
 
Preferred stock dividends
(3,305
)
 
(3,309
)
Repurchase of common stock, for treasury
(18,763
)
 
(53,214
)
Proceeds from common stock issued pursuant to stock option exercise
1,528

 
4,099

Performance restricted stock surrendered for employee tax payment
(96
)
 

Repayment of long-term debt

 
(23,250
)
Proceeds from long-term debt

 
43,500

Capital lease payments and other
(1,711
)
 
(47
)
Net cash used in financing activities
(22,347
)
 
(32,221
)
Effect of exchange rate changes on cash
464

 
(39
)
Net change in cash and cash equivalents
19,916

 
(22,153
)
Cash and cash equivalents at beginning of period
72,262

 
84,770

Cash and cash equivalents at end of period
$
92,178

 
$
62,617

 
 
 
 
Supplemental cash flow information:
 
 
 
Cash paid for interest
$
776

 
$
8,873

Cash paid for income taxes
$
14,804

 
$
50,037

Prepaid financing and subsidiary stock issuance costs
$

 
$
1,049

Accrued unfunded future equity investment capital contributions
$

 
$
1,590

Purchase of equipment through capital lease obligation
$

 
$
809

 See accompanying notes to the unaudited condensed consolidated financial statements

7



The Providence Service Corporation
Notes to the Unaudited Condensed Consolidated Financial Statements
September 30, 2017
(in thousands except years, share and per share data)
 
1.    Organization and Basis of Presentation

Description of Business

The Providence Service Corporation (“we”, the “Company” or “Providence”), through its subsidiaries and other companies in which it owns interests, is primarily engaged in the provision of healthcare and workforce development services for public and private sector entities seeking to control costs and promote positive outcomes. The subsidiaries and other companies in which the Company holds interests comprise the following segments:
Non-Emergency Transportation Services (“NET Services”) – Nationwide provider of non-emergency medical transportation programs for state governments and managed care organizations.
Workforce Development Services (“WD Services”) – Global provider of employment preparation and placement and legal offender rehabilitation services to eligible participants of government sponsored programs.
Matrix Investment – Minority interest in nationwide provider of in-home care optimization and management solutions, including comprehensive health assessments, to members of managed care organizations, accounted for as an equity method investment.

Basis of Presentation

The Company follows accounting standards set by the Financial Accounting Standards Board (“FASB”). The FASB establishes accounting principles generally accepted in the United States (“GAAP”). Rules and interpretive releases of the Securities and Exchange Commission (“SEC”) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification (“ASC”), which serves as the single source of authoritative non-SEC accounting and reporting standards to be applied by non-governmental entities. All amounts are presented in United States (“U.S.”) dollars, unless otherwise noted.

The Company’s unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial information, and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and disclosures required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for the fair presentation of the results of the interim periods have been included.

The Company has made estimates relating to the reporting of assets and liabilities, revenues and expenses and certain disclosures to prepare these unaudited condensed consolidated financial statements in conformity with GAAP. Actual results could differ from those estimates. Operating results for the three and nine months ended September 30, 2017 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2017. Management has evaluated events and transactions that occurred after the balance sheet date and through the date these unaudited condensed consolidated financial statements were filed, and considered the effect of such events in the preparation of these unaudited condensed consolidated financial statements.

The condensed consolidated balance sheet at December 31, 2016 has been derived from the audited financial statements at that date, but does not include all the information and footnotes required by GAAP for complete financial statements. The unaudited condensed consolidated financial statements contained herein should be read in conjunction with the audited financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

The Company holds investments that are accounted for using the equity method. The Company does not control the decision-making process or business management practices of these affiliates. While the Company has access to certain information and performs certain procedures to review the reasonableness of information, the Company relies on management of these affiliates to provide accurate financial information prepared in accordance with GAAP. The Company receives audit reports relating to such financial information from the affiliates’ independent auditors on an annual basis. The Company is not aware of any errors in or possible misstatements of the financial information provided by its equity affiliates that would have a material effect on the Company’s condensed consolidated financial statements.


8



Reclassifications

We have reclassified certain amounts relating to our prior period results to conform to our current period presentation. On October 19, 2016, affiliates of Frazier Healthcare Partners purchased a 53.2% equity interest in CCHN Group Holdings, Inc. and its subsidiaries (“Matrix”) with Providence retaining a 46.8% equity interest (the “Matrix Transaction”). Prior to the closing of the Matrix Transaction, the financial results of Matrix were included in the Company’s Health Assessment Services (“HA Services”) segment. Operating results for this segment are reported as discontinued operations, net of tax in the condensed consolidated statements of income for the three and nine months ended September 30, 2016. See Note 13, Discontinued Operations, for further information. See Note 2, Significant Accounting Policies and Recent Accounting Pronouncements, for additional information on other reclassifications.

2.    Significant Accounting Policies and Recent Accounting Pronouncements

The Company adopted the following accounting pronouncements during the nine months ended September 30, 2017:

In November 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (“ASU 2015-17”), which changes how deferred taxes are classified on organizations’ balance sheets. The ASU eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The amendments apply to all organizations that present a classified balance sheet. For public companies, the amendments are effective for financial statements issued for annual periods beginning after December 16, 2016, and interim periods within those annual periods. The Company adopted ASU 2015-17 retrospectively on January 1, 2017, which resulted in the reclassification of the December 31, 2016 deferred tax assets-current balance of $6,825 and non-current deferred tax assets of $2,493 to long-term deferred tax liabilities in the amount of $9,318.

In March 2016, the FASB issued ASU No. 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting (“ASU 2016-07”). ASU 2016-07 eliminates the requirement that when an investment qualifies for use of the equity method as a result of an increase in the level of ownership interest or degree of influence, an investor must adjust the investment, results of operations, and retained earnings retroactively on a step-by-step basis as if the equity method had been in effect during all previous periods that the investment had been held. ASU 2016-07 instead specifies that the investor should add the cost of acquiring the additional interest in the investee to the current basis of the investor’s previously held interest and apply the equity method of accounting as of the date the investment became qualified for equity method accounting. ASU 2016-07 is effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016 and should be applied prospectively. The Company adopted ASU 2016-07 on January 1, 2017. The adoption of ASU 2016-07 had no impact on the Company’s financial statements or disclosures.

In March 2016, the FASB issued ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”). ASU 2016-09 is intended to improve the accounting for employee share-based payments and affect all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including income tax consequences, classification of awards as either equity or liabilities and classification in the statement of cash flows. For public companies, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. The Company adopted ASU 2016-09 on January 1, 2017, and elected to recognize forfeitures as they occur. As a result, the Company recorded a cumulative effect adjustment of $850 to retained earnings as of January 1, 2017. Upon adoption, all excess tax benefits and tax deficiencies related to employee share-based payments are recognized through income tax expense prospectively. For the three and nine months ended September 30, 2017, the Company recorded excess tax deficiencies of $261 and $148, respectively, as an increase to the provision for income taxes. The Company excluded the related tax benefits when applying the treasury stock method for computing diluted shares outstanding on a prospective basis resulting in a decrease in diluted weighted average shares outstanding of 4,779 and 7,451 shares, respectively, for the three and nine months ended September 30, 2017.

The adoption of ASU 2016-09 subjects our tax rate to quarterly volatility from the effects of stock award exercises and vesting activities, including the adverse impact on our income tax provision for awards which result in a tax deduction less than the amount recorded for financial reporting purposes based upon the fair value of the award at the grant date. For example, no shares will be distributed under the Company’s 2015 Holding Company LTI Program (the “HoldCo LTIP”) unless the volume weighted average of Providence’s stock price over a 90-day period ending on December 31, 2017 exceeds $56.79. If this market condition is not satisfied, a significant tax shortfall will result, causing an adverse impact on our tax provision.



9



The Company elected to apply the change in classification of cash flows resulting from excess tax benefits or deficiencies on a retrospective basis. This resulted in an increase in cash flows provided by operating activities of $276 and an increase of $276 in cash flows used in financing activities in the condensed consolidated statement of cash flows for the nine months ended September 30, 2016. Additionally, ASU 2016-09 requires that employee taxes paid when an employer withholds shares for tax-withholding purposes be reported as financing activities in the consolidated statements of cash flows, which is how the Company has historically classified these amounts.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”). ASU 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. ASU 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company adopted ASU 2017-01 on April 1, 2017. The adoption of ASU 2017-01 had no impact on the Company’s financial statements or disclosures.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”). ASU 2017-04 removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step two of the goodwill impairment test. As a result, under ASU 2017-04, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the impairment loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. This guidance is effective prospectively for fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed after January 1, 2017. The Company adopted ASU 2017-04 on April 1, 2017. The adoption of ASU 2017-04 had no impact on the Company’s financial statements or disclosures.

Updates to the recent accounting pronouncements as disclosed in the Company’s Form 10-K for the year ended December 31, 2016 are as follows:

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”). ASU 2014-09 introduced FASB Accounting Standards Codification Topic 606 (“ASC 606”), which will replace most currently applicable existing revenue recognition guidance and is intended to improve and converge with international standards the financial reporting requirements for revenue from contracts with customers. The core principle of ASU 2014-09 is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. ASU 2014-09 also requires additional disclosures about the nature, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. ASU 2014-09 allows for adoption either on a full retrospective basis to each prior reporting period presented or on a modified retrospective basis with the cumulative effect of initially applying the new guidance recognized at the date of initial application, which will be effective for the Company beginning January 1, 2018.

The Company has developed an adoption plan, assembled a cross-functional project team and is in the process of assessing the impacts of applying ASC 606 to the Company’s financial statements, information systems and internal controls. The Company has elected to adopt ASU 2014-09 using the modified retrospective method. Additionally, the Company has performed detailed reviews of a significant number of its existing contracts with customers. These reviews have focused on several key considerations which could impact the Company's accounting and reporting under the new standard:
the effect of specified clauses on the term of many of the Company’s contracts with customers;
the nature of the promises in many of the Company’s contracts with customers to perform integrated services over a period of time;
whether and how much variable consideration to include when determining the transaction prices for its contracts with customers;
whether any of the Company’s customer contracts require performance over a series of distinct service periods and the impact on determining and allocating the transaction price; and
the manner in which the Company will measure its progress towards fully satisfying its performance obligations, including a determination of whether the Company may be able to use certain practical expedients.


10



These reviews are substantially complete for NET Services and are ongoing for WD Services. The Company expects little to no impact within NET Services from the adoption of ASU 2014-09, and is implementing controls and process changes needed to apply ASC 606. Within WD Services, the Company expects certain amounts of variable consideration related to contingent revenue will be accelerated. Such amounts were previously deferred until the final resolution of the contingency. Management’s assessment is ongoing; however, management does not believe the impact of ASC 606 on its financial statements will be significant based on the procedures performed to date.

In January 2017, the FASB issued ASU No. 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments - Equity Method and Joint Ventures (Topic 323) (“ASU 2017-03”). ASU 2017-03 expands required qualitative disclosures when registrants cannot reasonably estimate the impact that adoption of an ASU will have on the financial statements. Such qualitative disclosures would include a comparison of the registrant’s new accounting policies, if determined, to current accounting policies, a description of the status of the registrant’s process to implement the new standard and a description of the significant implementation matters yet to be addressed by the registrant. Other than enhancements to the qualitative disclosures regarding future adoption of new ASUs, adoption of the provisions of this standard is not expected to have any impact on the Company’s consolidated financial statements.

In May 2017, the FASB issued ASU No. 2017-09, Compensation–Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”). ASU 2017-09 provides guidance about which changes to the terms of a share-based payment award should be accounted for as a modification. A change to an award should be accounted for as a modification unless the fair value of the modified award is the same as the original award, the vesting conditions do not change, and the classification as an equity or liability instrument does not change. This guidance is effective for fiscal years beginning after December 15, 2017. Early adoption is permitted. The adoption of ASU 2017-09 is not expected to have a material impact on the Company’s consolidated financial statements.

There were no other significant updates to the new accounting guidance not yet adopted by the Company as disclosed in its Form 10-K for the year ended December 31, 2016.

3.    Equity Investment

Matrix

Prior to the closing of the Matrix Transaction on October 19, 2016, the financial results of Matrix were included in the Company’s HA Services segment. Subsequent to the closing of the Matrix Transaction, the Company owned a 46.8% noncontrolling interest in Matrix. As of September 30, 2017, the Company owned a 46.6% noncontrolling interest in Matrix. Pursuant to a Shareholder’s Agreement, affiliates of Frazier Healthcare Partners hold rights necessary to control the fundamental operations of Matrix. The Company accounts for this investment in Matrix under the equity method of accounting and the Company’s share of Matrix’s income or losses are recorded as “Equity in net (gain) loss of investees” in the accompanying condensed consolidated statements of income.

The carrying amount of the assets included in the Company’s condensed consolidated balance sheet and the maximum loss exposure related to the Company’s interest in Matrix as of September 30, 2017 and December 31, 2016 totaled $156,883 and $157,202, respectively.

Summary financial information for Matrix on a standalone basis is as follows:
 
September 30, 2017
 
December 31, 2016
Current assets
$
50,015

 
$
28,589

Long-term assets
598,842

 
614,841

Current liabilities
39,273

 
25,791

Long-term liabilities
270,816

 
281,348

 
Three months ended
September 30, 2017
Revenue
$
58,639

Operating income
3,159

Net loss
(537
)

11



 
Nine months ended
September 30, 2017
Revenue
$
175,346

Operating income
10,109

Net loss
(775
)

See Note 13, Discontinued Operations, for Matrix’s 2016 results of operations.

Mission Providence

The Company entered into a joint venture agreement in November 2014 with Mission Australia ACN ("Mission Australia") to form Mission Providence Pty Ltd (“Mission Providence”). Mission Providence delivers employment preparation and placement services in Australia. The Company had a 60% ownership interest in Mission Providence, and had rights to 75% of Mission Providence’s distributions of cash or profit surplus twice per calendar year. The Company accounted for this investment under the equity method of accounting and the Company’s share of Mission Providence’s income or losses was recorded as “Equity in net (gain) loss of investees” in the accompanying condensed consolidated statements of income. Cash contributions made to Mission Providence in exchange for its equity interests are included in the condensed consolidated statements of cash flows as “Equity investments.”

On September 29, 2017, the Company and Mission Australia completed the sale of 100% of the stock of Mission Providence pursuant to a share sale agreement. Upon the sale of Mission Providence, the Company received AUD 20,184, or $15,823 of proceeds, for its equity interest, net of transaction fees. The related gain on sale of Mission Providence totaling $12,606 is recorded as “Gain on sale of equity investment” in the accompanying condensed consolidated statements of income. The carrying amount of the assets included in the Company’s condensed consolidated balance sheet related to the Company’s interest in Mission Providence was $4,021 at December 31, 2016.

Summary financial information for Mission Providence on a standalone basis is as follows:
 
December 31, 2016
Current assets
$
4,640

Long-term assets
10,473

Current liabilities
12,844

Long-term liabilities
1,655

 
Three months ended September 30,
 
2017
 
2016
Revenue
$
10,244

 
$
9,349

Operating loss
(599
)
 
(2,903
)
Net loss
(651
)
 
(2,059
)
 
Nine months ended September 30,
 
2017
 
2016
Revenue
$
30,125

 
$
26,475

Operating loss
(1,765
)
 
(10,697
)
Net loss
(1,934
)
 
(7,627
)


12



 4.    Prepaid Expenses and Other

Prepaid expenses and other were comprised of the following: 
 
September 30,
2017
 
December 31,
2016
Prepaid income taxes
$
3,819

 
$
1,467

Escrow funds
10,000

 
10,000

Prepaid insurance
2,778

 
3,153

Prepaid taxes and licenses
2,526

 
3,570

Note receivable
3,201

 
3,130

Prepaid rent
2,727

 
2,013

Deposits held for leased premises and bonds
2,744

 
2,609

Other
11,288

 
11,953

Total prepaid expenses and other
$
39,083

 
$
37,895


Escrow funds represent amounts related to potential indemnification claims from the sale of the Human Services segment, which was completed on November 1, 2015. The Company has accrued $15,000 as a contingent liability for the settlement of potential indemnification claims, which is included in “Accrued expenses” in the condensed consolidated balance sheet as of September 30, 2017. While the matter is not resolved, it is highly likely the escrow funds will be used to satisfy a portion of this settlement. See Note 11, Commitments and Contingencies, for further information.

5.    Accrued Expenses

Accrued expenses consisted of the following:
 
September 30,
2017
 
December 31, 2016
Accrued compensation
$
24,058

 
$
23,050

NET Services accrued contract payments
26,504

 
32,836

Accrued settlement
15,000

 
6,000

Income taxes payable

 
372

Other
37,835

 
40,123

Total accrued expenses
$
103,397

 
$
102,381


6.    Restructuring and Related Reorganization Costs

WD Services has three redundancy programs. Two redundancy plans were approved in 2015 and have been substantially completed; a plan related to the termination of employees delivering services under an offender rehabilitation program (“Offender Rehabilitation Program”) and a plan related to the termination of employees delivering services under the Company’s employability and skills training programs and certain other employees in the United Kingdom (“UK Restructuring Program”). In addition, a redundancy plan related to the termination of employees as part of a value enhancement project ("Ingeus Futures Program") to better align costs at Ingeus with revenue and to improve overall operating performance was approved in 2016. The Company recorded severance and related charges of $1,117 and $4,741 during the nine months ended September 30, 2017 and 2016, respectively, relating to the termination benefits for employee groups and specifically identified employees impacted by these plans. The severance charges incurred are recorded as “Service expense” in the accompanying condensed consolidated statements of income.

The initial estimate of severance and related charges for the plans was based upon the employee groups impacted, average salary and benefits, and redundancy benefits pursuant to the existing policies. Additional charges above the initial estimates were incurred for the redundancy plans during the nine months ended September 30, 2017 and 2016 related to the actualization of termination benefits for specifically identified employees impacted under these plans, as well as an increase in the number of individuals impacted by these plans. The final identification of the employees impacted by each program is subject to customary consultation procedures.


13



Summary of Severance and Related Charges
 
January 1,
2017
 
Costs
Incurred
 
Cash Payments
 
Foreign Exchange
Rate Adjustments
 
September 30, 2017
 
 
 
 
 
 
 
 
 
 
Ingeus Futures' Program
$
2,486

 
$
1,186

 
$
(3,086
)
 
$
158

 
$
744

Offender Rehabilitation Program
1,380

 
(40
)
 
(1,357
)
 
17

 

UK Restructuring Program
50

 
(29
)
 

 
3

 
24

Total
$
3,916

 
$
1,117

 
$
(4,443
)
 
$
178

 
$
768

 
January 1,
2016
 
Costs
Incurred
 
Cash Payments
 
Foreign Exchange
Rate Adjustments
 
September 30, 2016
 
 
 
 
 
 
 
 
 
 
Offender Rehabilitation Program
$
6,538

 
$
4,204

 
$
(6,075
)
 
$
(906
)
 
$
3,761

UK Restructuring Program
2,059

 
537

 
(2,379
)
 
(103
)
 
114

Total
$
8,597

 
$
4,741

 
$
(8,454
)
 
$
(1,009
)
 
$
3,875


The total of accrued severance and related costs of $768 is reflected in “Accrued expenses” in the condensed consolidated balance sheet at September 30, 2017. The amount accrued as of September 30, 2017 is expected to be settled principally by the end of 2017.

7.    Stockholders’ Equity

The following table reflects changes in common stock, additional paid-in capital, retained earnings, accumulated other comprehensive loss, treasury stock and noncontrolling interest for the nine months ended September 30, 2017:
 
Common Stock
 
Additional Paid-In Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Loss
 
Treasury Stock
 
Non-controlling Interest
 
 Total
 
Shares
 
Amount
 
 
 
 
Shares
 
Amount
 
 
Balance at December 31, 2016
17,315,661

 
$
17

 
$
302,010

 
$
156,718

 
$
(33,449
)
 
3,478,676

 
$
(125,201
)
 
$
(2,420
)
 
$
297,675

Stock-based compensation

 

 
4,636

 

 

 

 

 

 
4,636

Exercise of employee stock options
70,283

 

 
1,468

 

 

 
5,665

 
(238
)
 

 
1,230

Restricted stock issued
31,316

 

 

 

 

 
17,865

 
(779
)
 

 
(779
)
Performance restricted stock issued
3,773

 

 
(96
)
 

 

 

 

 

 
(96
)
Shares issued for bonus settlement and director stipend
25,225

 


 
1,107

 


 

 

 

 

 
1,107

Stock repurchase plan

 

 

 

 

 
441,965

 
(17,983
)
 

 
(17,983
)
Conversion of convertible preferred stock to common stock
415

 

 
17

 

 

 

 

 

 
17

Foreign currency translation adjustments, net of tax

 

 

 

 
6,591

 

 

 
(182
)
 
6,409

Reclassification of translation loss realized upon sale of equity investment

 

 

 

 
527

 

 

 

 
527

Convertible preferred stock dividends

 

 

 
(3,305
)
 

 

 

 

 
(3,305
)
Noncontrolling interests

 

 

 

 

 

 

 
295

 
295

Other

 

 
25

 

 

 

 

 

 
25

Net income attributable to Providence

 

 

 
14,441

 

 

 

 

 
14,441

Cumulative effect adjustment from change in accounting principle

 

 
850

 
(850
)
 

 

 

 

 

Balance at September 30, 2017
17,446,673

 
$
17

 
$
310,017

 
$
167,004

 
$
(26,331
)
 
3,944,171

 
$
(144,201
)
 
$
(2,307
)
 
$
304,199



14



8.    Stock-Based Compensation and Similar Arrangements

The Company provides stock-based compensation to employees and non-employee directors under the Company’s 2006 Long-Term Incentive Plan (“2006 Plan”). Typical awards issued under this plan include stock option awards, restricted stock awards (“RSAs”) and performance based restricted stock units (“PRSUs”). In addition, the Company has a long-term incentive plan designed to provide long-term performance based awards to certain executive officers of the Company which also falls under the 2006 Plan.

The following table reflects the amount of stock-based compensation, for share settled awards, recorded in each financial statement line item for the three and nine months ended September 30, 2017 and 2016:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Service expense
$
131

 
$
100

 
$
365

 
$
280

General and administrative expense
1,434

 
1,135

 
4,221

 
2,858

Equity in net loss of investees
10

 

 
50

 

Discontinued operations, net of tax

 
22

 

 
66

Total stock-based compensation
$
1,575

 
$
1,257

 
$
4,636

 
$
3,204


Stock-based compensation, for share settled awards, includes $1,014 and $3,098 for the three and nine months ended September 30, 2017, respectively, related to the HoldCo LTIP. Stock-based compensation, for share settled awards, includes $921 and $2,383 for the three and nine months ended September 30, 2016, respectively, related to the HoldCo LTIP. No shares will be distributed under the HoldCo LTIP unless the volume weighted average of Providence’s stock price over a 90-day period ending on December 31, 2017 is greater than $56.79.

At September 30, 2017, the Company had 300,831 stock options outstanding with a weighted-average exercise price of $37.97. The Company also had 71,193 shares of unvested RSAs outstanding at September 30, 2017 with a weighted-average grant date fair value of $44.33 and 18,298 unvested PRSUs outstanding.

The Company also grants stock equivalent unit awards (“SEUs”) and stock option equivalent units that are cash settled awards and are not included as part of the 2006 Plan. During the three and nine months ended September 30, 2017, respectively, the Company recorded $380 and $1,611 of stock-based compensation expense for cash settled awards. During the three and nine months ended September 30, 2016, respectively, the Company recorded $422 and $305 of stock-based compensation expense for cash settled awards. The expense and benefit for cash settled awards is included as “General and administrative expense” in the accompanying condensed consolidated statements of income. As the awards are cash settled, a significant amount of the expense recorded for the three and nine months ended September 30, 2017 and 2016 is attributable to the Company’s increase or decrease in stock price from the previous reporting period. The liability for unexercised cash settled share-based payment awards of $3,168 and $1,764 at September 30, 2017 and December 31, 2016, respectively, are reflected in “Accrued expenses” in the condensed consolidated balance sheets. At September 30, 2017, the Company had 6,671 SEUs and 200,000 stock option equivalent units outstanding.

The Company also provides cash settled long-term incentive plans for executive management and key employees of its operating segments. During the three months ended June 30, 2017, the Company revised the structure of the NET Services long-term incentive plan. As a result, the Company finalized the amount payable under the plan at $2,956. The total value will be paid to the awarded participants per the terms of the original agreement and thus the remaining unamortized expense relating to this plan continues to be recognized over the remaining service period. As of September 30, 2017, unamortized compensation expense is $696. For the three and nine months ended September 30, 2017, expenses of $274 and $419, respectively, are included as “Service expense” in the condensed consolidated statements of income related to these plans. For the three and nine months ended September 30, 2016, $1,157 and $3,151, respectively, of expense are included as “Service expense” in the condensed consolidated statements of income related to these plans. At September 30, 2017, the liability for long-term incentive plans of the Company’s operating segments of $2,260 is reflected in “Accrued expenses” and “Other long-term liabilities” in the condensed consolidated balance sheet.  At December 31, 2016, the liability for long-term incentive plans of the Company’s operating segments of $1,841 is reflected in “Other long-term liabilities” in the condensed consolidated balance sheet.


15



9.    Earnings Per Share

The following table details the computation of basic and diluted earnings per share: 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Numerator:
 
 
 
 
 
 
 
Net income attributable to Providence
$
14,853

 
$
650

 
$
14,441

 
$
7,508

Less dividends on convertible preferred stock
(1,114
)
 
(1,111
)
 
(3,305
)
 
(3,309
)
Less income allocated to participating securities
(1,777
)
 
(284
)
 
(2,209
)
 
(502
)
Net income (loss) available to common stockholders
$
11,962

 
$
(745
)
 
$
8,927

 
$
3,697

 
 
 
 
 
 
 
 
Continuing operations
$
11,978

 
$
2,046

 
$
14,927

 
$
3,405

Discontinued operations
(16
)
 
(2,791
)
 
(6,000
)
 
292

 
$
11,962

 
$
(745
)
 
$
8,927

 
$
3,697

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Denominator for basic earnings per share -- weighted-average shares
13,581,662

 
14,523,408

 
13,612,764

 
14,823,757

Effect of dilutive securities:
 
 
 
 
 
 
 
Common stock options
68,856

 
111,075

 
58,668

 
119,267

Performance-based restricted stock units
5,036

 

 
5,036

 


Denominator for diluted earnings per share -- adjusted weighted-average shares assumed conversion
13,655,554

 
14,634,483

 
13,676,468

 
14,943,024

 
 
 
 
 
 
 
 
Basic earnings (loss) per share:
 
 
 
 
 
 
 
Continuing operations
$
0.88

 
$
0.14

 
$
1.10

 
$
0.23

Discontinued operations

 
(0.19
)
 
(0.44
)
 
0.02

 
$
0.88

 
$
(0.05
)
 
$
0.66

 
$
0.25

Diluted earnings (loss) per share:
 
 
 
 
 
 
 
Continuing operations
$
0.88

 
$
0.14

 
$
1.09

 
$
0.23

Discontinued operations

 
(0.19
)
 
(0.44
)
 
0.02

 
$
0.88

 
$
(0.05
)
 
$
0.65

 
$
0.25


Income allocated to participating securities is calculated by allocating a portion of net income attributable to Providence, less dividends on convertible stock, to the convertible preferred stockholders on a pro-rata as converted basis; however, the convertible preferred stockholders are not allocated losses.

The following weighted average shares were not included in the computation of diluted earnings per share as the effect of their inclusion would have been anti-dilutive:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Stock options to purchase common stock
33,890

 
33,957

 
56,528

 
33,957

Convertible preferred stock
803,285

 
803,398

 
803,360

 
803,457



16



10.    Income Taxes

The Company’s effective tax rate from continuing operations for the three and nine months ended September 30, 2017 was 16.7% and 28.8%, respectively. The Company’s effective tax rate from continuing operations for the three and nine months ended September 30, 2016 was 55.6% and 64.9%, respectively. The effective tax rates for the three and nine months ended September 30, 2016 exceeded the U.S. federal statutory rate of 35% primarily due to foreign net operating losses (including equity investment losses in certain of the periods) for which the future income tax benefit currently cannot be recognized, losses in foreign jurisdictions with tax rates lower than the U.S. rate of 35%, state income taxes and certain non-deductible expenses. Foreign net operating losses for which no tax benefit can be provided were higher in 2016 versus 2017 resulting in a decrease in the effective tax rate from 2016 to 2017. Additionally, for the three and nine months ended September 30, 2017, there was no provision for income taxes related to the gain on sale of equity investment of $12,606 due to the substantial difference in tax basis versus book basis in the investment.

The Company recorded excess tax deficiencies for the three and nine months ended September 30, 2017 of $261 and $148, respectively, which increased the provision for income taxes. These excess tax deficiencies were a result of applying the guidance in ASU 2016-09 as further discussed in Note 2, Significant Accounting Policies and Recent Accounting Pronouncements.

The adoption of ASU 2016-09 subjects our tax rate to quarterly volatility from the effects of stock award exercises and vesting activities, including the adverse impact on our income tax provision for awards which result in a tax deduction less than the amount recorded for financial reporting purposes based upon the fair value of the award at the grant date. For example, no shares will be distributed under the HoldCo LTIP unless the volume weighted average of Providence’s stock price over a 90-day period ending on December 31, 2017 exceeds $56.79. If this market condition is not satisfied, a significant tax shortfall will result, causing an adverse impact on our tax provision.


11.    Commitments and Contingencies

Legal proceedings

On June 15, 2015, a putative stockholder class action derivative complaint was filed in the Court of Chancery of the State of Delaware (the “Court”), captioned Haverhill Retirement System v. Kerley et al., C.A. No. 11149-VCL (“Haverhill Litigation”).

On September 28, 2017, the Court approved a proposed settlement agreement among the parties that provides for a settlement amount of $10,000 less plaintiff’s legal fees and expenses (the “Settlement Amount”), with 75% of the Settlement Amount to be paid to the Company and 25% of the Settlement Amount to be paid to holders of the Company’s common stock other than certain excluded parties. The Company expects to receive a payment of approximately $5,000. As this amount is considered a gain contingency, the Company has not recorded a receivable for this amount as of September 30, 2017.

For further information regarding this legal proceeding please see Note 19, Commitments and Contingencies, in the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 and Note 11, Commitments and Contingencies, in the unaudited condensed consolidated financial statements included in the Company’s Quarterly Reports on Form 10-Q for the periods ended March 31, 2017 and June 30, 2017.

In addition to the matter described above, in the ordinary course of business, the Company is a party to various lawsuits. Management does not expect these lawsuits to have a material impact on the liquidity, results of operations, or financial condition of Providence.


17



Indemnifications related to Haverhill Litigation

The Company completed a rights offering on February 5, 2015 (the “Rights Offering”) providing all of the Company’s existing common stockholders the non-transferable right to purchase their pro rata share of $65,500 of convertible preferred stock at a price equal to $100.00 per share (“Preferred Stock”). Stockholders exercised subscription rights to purchase 130,884 shares of the Company's Preferred Stock. Pursuant to the terms and conditions of the Standby Purchase Agreement (the “Standby Purchase Agreement”) between Coliseum Capital Partners, L.P., Coliseum Capital Partners II, L.P., Coliseum Capital Co-Invest, L.P. and Blackwell Partners, LLC (collectively, the “Standby Purchasers”) and the Company, the remaining 524,116 shares of the Company’s Preferred Stock were purchased by the Standby Purchasers at the $100.00 per share subscription price. The Company has indemnified the Standby Purchasers from and against any and all losses, claims, damages, expenses and liabilities relating to or arising out of (i) any breach of any representation, warranty, covenant or undertaking made by or on behalf of the Company in the Standby Purchase Agreement and (ii) the transactions contemplated by the Standby Purchase Agreement and the 14.0% Unsecured Subordinated Note in aggregate principal amount of $65,500, except to the extent that any such losses, claims, damages, expenses and liabilities are attributable to the gross negligence, willful misconduct or fraud of such Standby Purchaser.

The Company has also indemnified other third parties from and against any and all losses, claims, damages, expenses and liabilities arising out of or in connection with the Company’s acquisition of CCHN Group Holdings, Inc. (operating under the tradename Matrix, and formerly included in our HA Services segment) in October 2014 and related financing commitments, except to the extent that any such losses, claims, damages, expenses and liabilities are found in a final, non-appealable judgment by a court of competent jurisdiction to have resulted from the gross negligence, bad faith or willful misconduct of such third parties, or a material breach of such third parties’ obligations under the related agreements.

The Company recorded $21 and $296 of such indemnified legal expenses related to the Haverhill Litigation during the three and nine months ended September 30, 2017, respectively, and $791 and $935 of such indemnified legal expenses during the three and nine months ended September 30, 2016, respectively, which is included in “General and administrative expenses” in the condensed consolidated statements of income. Of these amounts, $23 and $231 for the three and nine months ended September 30, 2017, respectively, and $360 and $504 for the three and nine months ended September 30, 2016, respectively, were indemnified legal expenses of related parties. Other legal expenses of the Company related to the Haverhill Litigation are covered under the Company’s insurance policies, subject to applicable deductibles and customary review of the expenses by the carrier. The Company recognized related benefit of $3 and expense of $8 for the three and nine months ended September 30, 2017, respectively, and related expense of $107 for the three and nine months ended September 30, 2016. While the carrier typically remits payment directly to the respective law firm, the Company accrues for the cost and records a corresponding receivable for the amount to be paid by the carrier. The Company has recognized an insurance receivable of $903 and $1,645 in “Other receivables” in the condensed consolidated balance sheets at September 30, 2017 and December 31, 2016, respectively, with a corresponding liability amount recorded to “Accrued expenses”.

Other Indemnifications

The Company has provided certain standard indemnifications in connection with the sale of the Human Services segment to Molina Healthcare Inc. (“Molina”) effective November 1, 2015. All representations and warranties made by the Company in the Membership Interest Purchase Agreement (the “Purchase Agreement”) to sell the Human Services segment ended on February 1, 2017. However, claims made prior to February 1, 2017 by the purchaser of the Human Services segment against these representations and warranties may survive until the claims are settled. In addition, certain representations, including tax representations, survive until the expiration of applicable statutes of limitation, and healthcare representations survive until the third anniversary of the closing date. The Company received indications from the purchaser of the Human Services segment prior to the February 1, 2017 deadline regarding potential indemnification claims. One such potential indemnification claim relates to Rodriguez v. Providence Community Corrections (the “Rodriguez Litigation”), a complaint filed in the District Court for the Middle District of Tennessee, Nashville Division (the “Rodriguez Court”), against Providence Community Corrections, Inc. (“PCC”), an entity sold under the Purchase Agreement. In September 2017, the parties to the Rodriguez Litigation submitted a proposed settlement to the Rodriguez Court for approval pursuant to which PCC would pay the plaintiffs approximately $14,000. In October 2017, the Rodriguez Court denied preliminary approval of the settlement agreement and requested that the parties provide additional information. In October 2017, the parties submitted an amended motion for the Rodriguez Court to approve the proposed settlement.

Molina and the Company have entered into a memorandum of understanding regarding a settlement of an indemnification claim by Molina with respect to the Rodriguez Litigation and other matters. As of September 30, 2017, the accrual is $15,000 with respect to an estimate of loss for potential indemnification claims. The Company expects to recover a substantial portion of the settlement through insurance coverage, although this cannot be assured.


18



The Company has provided certain standard indemnifications in connection with its Matrix stock subscription transaction whereby Mercury Fortuna Buyer, LLC (“Subscriber”), Providence and Matrix entered into a stock subscription agreement (the “Subscription Agreement”), dated August 28, 2016.  The representations and warranties made by the Company in the Subscription Agreement survive through the 15th month following the closing date; however, certain fundamental representations survive through the 36th month following the closing date.  The covenants and agreements of the parties to be performed prior to the closing survive through the 15th month following the closing date, and all other covenants and agreements survive until the expiration of the applicable statute of limitations in the event of a breach, or for such lesser periods specified therein. The Company is not aware of any indemnification liabilities with respect to Matrix that require accrual at September 30, 2017.

Other Contingencies
On October 26, 2017, the UK Ministry of Justice (the “MOJ”) released a report on reoffending statistics for certain offenders who entered probation services during the period October 2015 to December 2015. The report provides statistics for all providers of probation services, including the Company’s subsidiary Reducing Reoffending Partnership (“RRP”). This information is the first data set that is utilized to determine performance payments under the various providers’ transforming rehabilitation contracts with the MOJ, as the actual rates of recidivism are compared to benchmark rates established by the MOJ. Across the industry, including for RRP, while certain rates of recidivism were less than the applicable benchmarks, other rates exceeded the benchmarks established by the MOJ. If such rates of recidivism were to continue to exceed the benchmark rates established by the MOJ, RRP could be required to make payments to the MOJ, which amounts could be material. The amount of potential payments to the MOJ, if any, under RRP’s contracts with the MOJ is not estimable at this time, as the MOJ is reviewing the data to understand the underlying reasons for the increase in certain rates of recidivism and other factors that could impact the contractual measure.
Loss Reserves for Certain Reinsurance Programs
The Company historically reinsured a substantial portion of its automobile, general and professional liability and workers’ compensation costs under reinsurance programs through the Company’s wholly-owned subsidiary, Social Services Providers Captive Insurance Company (“SPCIC”), a licensed captive insurance company domiciled in the State of Arizona. As of May 16, 2017, SPCIC did not renew the expiring reinsurance policies. SPCIC will continue to resolve claims under the historical policy years.

The Company utilizes a report prepared by an independent actuary to estimate the gross expected losses related to historical automobile, general and professional and workers’ compensation liability reinsurance policies, including the estimated losses in excess of SPCIC’s insurance limits, which would be reimbursed to SPCIC to the extent such losses were incurred.  As of September 30, 2017 and December 31, 2016, the Company had reserves of $8,309 and $11,195, respectively, for the automobile, general and professional liability and workers’ compensation reinsurance policies, net of expected receivables for losses in excess of SPCIC’s historical insurance limits.  The gross reserve as of September 30, 2017 and December 31, 2016 of $14,407 and $16,460, respectively, is classified as “Reinsurance liability reserves” and “Other long-term liabilities” in the condensed consolidated balance sheets.  The estimated amount to be reimbursed to SPCIC as of September 30, 2017 and December 31, 2016 was $6,098 and $5,265, respectively, and is classified as “Other receivables" and “Other assets” in the condensed consolidated balance sheets.

Deferred Compensation Plan

The Company has one deferred compensation plan for highly compensated employees of NET Services as of September 30, 2017. The deferred compensation plan is unfunded, and benefits are paid from the general assets of the Company. The total of participant deferrals, which is reflected in “Other long-term liabilities” in the condensed consolidated balance sheets, was $1,718 and $1,430 at September 30, 2017 and December 31, 2016, respectively.

12.    Transactions with Related Parties

The Company incurred legal expenses under an indemnification agreement with the Standby Purchasers as further discussed in Note 11, Commitments and Contingencies. Convertible preferred stock dividends earned by the Standby Purchasers during the three and nine months ended September 30, 2017 totaled $1,062 and $3,151, respectively. Convertible preferred stock dividends earned by the Standby Purchasers during the three and nine months ended September 30, 2016 totaled $1,059 and $3,154, respectively.


19



During the three months ended March 31, 2017, the Company made a $566 loan to Mission Providence. The loan was repaid during the three months ended September 30, 2017.

13.  Discontinued Operations

On November 1, 2015, the Company completed the sale of the Human Services segment. During the three and nine months ended September 30, 2017, the Company recorded additional expenses related to the Human Services segment, principally related to legal proceedings as described in Note 11, Commitments and Contingencies, related to an indemnified legal matter.

Effective October 19, 2016, the Company completed the Matrix Transaction. Prior to the closing of the Matrix Transaction, the financial results of Matrix were included in the Company’s HA Services segment, which has been reflected as a discontinued operation for the three and nine months ended September 30, 2016. Following the Matrix Transaction, the Company has a continuing involvement with Matrix through its ownership interest in Matrix, which is accounted for as an equity method investment. As of September 30, 2017, the Company holds a 46.6% ownership interest in Matrix. Matrix’s pretax loss for the three and nine months ended September 30, 2017 totaled $582 and $896, respectively. There have been no cash inflows or outflows from or to Matrix subsequent to the closing of the Matrix Transaction, other than the payment of working capital adjustments and management fees associated with its ongoing relationship with Matrix, of which $841 was received during the nine months ended September 30, 2017. $259 and $185 are included in “Other receivables” in the condensed consolidated balance sheets at September 30, 2017 and December 31, 2016, respectively, related to management fees receivable.

Results of Operations

The following tables summarize the results of operations classified as discontinued operations, net of tax, for the three and nine months ended September 30, 2017 and 2016.
 
Three months ended September 30, 2017
 
Nine months ended September 30, 2017
 
Human
Services
Segment
 
HA Services
Segment
 
Total
Discontinued
Operations
 
Human
Services
Segment
 
HA Services
Segment
 
Total
Discontinued
Operations
 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
General and administrative expense
$
26

 
$

 
$
26

 
$
9,622

 
$

 
$
9,622

Total operating expenses
26

 

 
26

 
9,622

 

 
9,622

Loss from discontinued operations before income taxes
(26
)
 

 
(26
)
 
(9,622
)
 

 
(9,622
)
Income tax benefit
10

 

 
10

 
3,622

 

 
3,622

Discontinued operations, net of tax
$
(16
)
 
$

 
$
(16
)
 
$
(6,000
)
 
$

 
$
(6,000
)

General and administrative expenses for the three months ended September 30, 2017 includes legal expenses of $26. General and administrative expenses for the nine months ended September 30, 2017 includes an accrual of $9,000 for an estimated settlement of indemnified claims related to the sale of the Human Services segment, as well as related legal expenses of $622. See Note 11, Commitments and Contingencies, for additional information.

20



 
Three months ended September 30, 2016
 
Nine months ended September 30, 2016
 
Human
Services
Segment
 
HA Services
Segment
 
Total
Discontinued
Operations
 
Human
Services
Segment
 
HA Services
Segment
 
Total
Discontinued
Operations
 
 
 
 
 
 
 
 
 
 
 
 
Service revenue, net
$

 
$
52,557

 
$
52,557

 
$

 
$
155,421

 
$
155,421

 
 
 
 
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Service expense

 
38,703

 
38,703

 

 
113,455

 
113,455

General and administrative expense
7,463

 
1,505

 
8,968

 
7,463

 
2,823

 
10,286

Depreciation and amortization

 
5,359

 
5,359

 

 
21,121

 
21,121

Total operating expenses
7,463

 
45,567

 
53,030

 
7,463

 
137,399

 
144,862

Operating income (loss)
(7,463
)
 
6,990

 
(473
)
 
(7,463
)
 
18,022

 
10,559

 
 
 
 
 
 
 
 
 
 
 
 
Other expenses:
 
 
 
 
 
 
 
 
 
 
 
Interest expense, net

 
3,134

 
3,134

 

 
9,304

 
9,304

Income (loss) from discontinued operations before income taxes
(7,463
)
 
3,856

 
(3,607
)
 
(7,463
)
 
8,718

 
1,255

Income tax benefit (provision)
2,428

 
(1,612
)
 
816

 
2,428

 
(3,351
)
 
(923
)
Discontinued operations, net of tax
$
(5,035
)
 
$
2,244

 
$
(2,791
)
 
$
(5,035
)
 
$
5,367

 
$
332

 

Interest expense, net

The Company allocated interest expense, including amortization of deferred financing fees, to discontinued operations based on the portion of debt that was required to be repaid with the proceeds from the Matrix Transaction. The total allocated interest expense was $3,136 and $9,310 for the three and nine months ended September 30, 2016 respectively, and is included in “Interest expense, net” in the table above.

Cash Flow Information

The following table presents depreciation, amortization and capital expenditures of the discontinued operations for the nine months ended September 30, 2016:
 
Nine months ended September 30, 2016
 
 
Cash flows from discontinued operating activities:
 
Depreciation
$
3,661

Amortization
$
17,460

 
 
Cash flows from discontinued investing activities:
 
Purchase of property and equipment
$
8,020


14.    Segments

Providence, through its subsidiaries and other companies in which it holds interests, is primarily engaged in the provision of healthcare and workforce development services. The subsidiaries and other companies in which the Company holds interests comprise the following segments:
NET Services – Nationwide provider of non-emergency medical transportation programs for state governments and managed care organizations.

21



WD Services – Global provider of employment preparation and placement and legal offender rehabilitation services to eligible participants of government sponsored programs.
Matrix Investment – Minority interest in nationwide provider of in-home care optimization and management solutions, including comprehensive health assessments, to members of managed care organizations, accounted for as an equity method investment.

Effective October 19, 2016, pursuant to the Matrix Transaction, the Company no longer owns a controlling interest in Matrix, which historically constituted the HA Services segment as further discussed in Note 13, Discontinued Operations. As the HA Services segment, through October 19, 2016, is presented as a discontinued operation, it is not reflected in the Company’s segment disclosures.  However, the Company accounts for its noncontrolling interest in Matrix from October 19, 2016 through present as an equity method investment, which solely comprises the Matrix Investment in the table below.

The following tables set forth certain financial information from continuing operations attributable to the Company’s business segments for the three and nine months ended September 30, 2017 and 2016:
 
Three months ended September 30, 2017
 
NET Services
 
WD Services
 
Matrix
Investment
 
Corporate and
Other
 
Total
Service revenue, net
$
324,824

 
$
84,693

 
$

 
$

 
$
409,517

Service expense
304,454

 
73,581

 

 
(3
)
 
378,032

General and administrative expense
2,899

 
6,980

 

 
8,750

 
18,629

Depreciation and amortization
3,286

 
3,166

 

 
95

 
6,547

Operating income (loss)
$
14,185

 
$
966

 
$

 
$
(8,842
)
 
$
6,309

 
 
 
 
 
 
 
 
 
 
Equity in net gain (loss) of investee
$

 
$
(459
)
 
$
(1
)
 
$

 
$
(460
)
 
Three months ended September 30, 2016
 
NET Services
 
WD Services
 
Matrix
Investment
 
Corporate and
Other
 
Total
Service revenue, net
$
317,280

 
$
94,960

 
$

 
$
31

 
$
412,271

Service expense
293,919

 
84,051

 

 
518

 
378,488

General and administrative expense
2,860

 
6,780

 

 
7,680

 
17,320

Depreciation and amortization
3,051

 
3,497

 

 
122

 
6,670

Operating income (loss)
$
17,450

 
$
632

 
$

 
$
(8,289
)
 
$
9,793

 
 
 
 
 
 
 
 
 
 
Equity in net gain (loss) of investee
$

 
$
(1,517
)
 
$

 
$

 
$
(1,517
)
 
Nine months ended September 30, 2017
 
NET Services
 
WD Services
 
Matrix
Investment
 
Corporate and
Other
 
Total
Service revenue, net
$
987,662

 
$
229,332

 
$

 
$

 
$
1,216,994

Service expense
927,082

 
199,665

 

 
(2,269
)
 
1,124,478

General and administrative expense
8,879

 
20,944

 

 
23,882

 
53,705

Depreciation and amortization
9,763

 
9,695

 

 
258

 
19,716

Operating income (loss)
$
41,938

 
$
(972
)
 
$

 
$
(21,871
)
 
$
19,095

 
 
 
 
 
 
 
 
 
 
Equity in net gain (loss) of investee
$

 
$
(1,419
)
 
$
428

 
$

 
$
(991
)

22



 
Nine months ended September 30, 2016
 
NET Services
 
WD Services
 
Matrix
Investment
 
Corporate and
Other
 
Total
Service revenue, net
$
917,157

 
$
275,293

 
$

 
$
(24
)
 
$
1,192,426

Service expense
846,311

 
247,797

 

 
903

 
1,095,011

General and administrative expense
8,483

 
23,236

 

 
20,829

 
52,548

Depreciation and amortization
8,858

 
10,912

 

 
288

 
20,058

Operating income (loss)
$
53,505

 
$
(6,652
)
 
$

 
$
(22,044
)
 
$
24,809

 
 
 
 
 
 
 
 
 
 
Equity in net gain (loss) of investee
$

 
$
(5,693
)
 
$

 
$

 
$
(5,693
)

Geographic Information

Domestic service revenue, net, totaled 82.1% and 78.0% of service revenue, net for the nine months ended September 30, 2017 and 2016, respectively. Foreign service revenue, net, totaled 17.9% and 22.0% of service revenue, net for the nine months ended September 30, 2017 and 2016, respectively.

At September 30, 2017 and December 31, 2016, $99,352, or 26.0%, and $76,579, or 20.4%, respectively, of the Company’s net assets were located in countries outside of the U.S., including $15,823 of proceeds realized on the sale of the equity investment in Mission Providence.

15.    Subsequent Events

On November 2, 2017, the Company’s Board of Directors approved the extension of the Company’s existing stock repurchase program, authorizing the Company to engage in a common stock repurchase program to repurchase up to $69,624 (the amount remaining from the $100,000 repurchase amount authorized in 2016) in aggregate value of the Company’s common stock through December 31, 2018. Purchases under the common stock repurchase program may be made from time-to-time through a combination of open market repurchases (including Rule 10b5-1 plans), privately negotiated transactions, and accelerated share repurchase transactions, at the discretion of the Company’s officers, and as permitted by securities laws, covenants under existing bank agreements, and other legal requirements.




23



Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and accompanying notes for the three and nine months ended September 30, 2017 and 2016, as well as our consolidated financial statements and accompanying notes and management’s discussion and analysis of financial condition and results of operations included in our Form 10-K for the year ended December 31, 2016. For purposes of “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” references to Q3 2017 and Q3 2016 mean the three months ended September 30, 2017 and the three months ended September 30, 2016, respectively, and references to YTD 2017 and YTD 2016 mean the nine months ended September 30, 2017 and the nine months ended September 30, 2016, respectively.

Overview of our business

Providence, through its subsidiaries and other companies in which it holds interests, is primarily engaged in the provision of healthcare and workforce development services. The subsidiaries and other companies in which we hold interests comprise the following segments:
Non-Emergency Transportation Services (“NET Services”) – Nationwide provider of non-emergency medical transportation programs for state governments and managed care organizations.
Workforce Development Services (“WD Services”) – Global provider of employment preparation and placement and legal offender rehabilitation services to eligible participants of government sponsored programs.
Matrix Investment – Minority interest in nationwide provider of in-home care optimization and management solutions, including comprehensive health assessments, to members of managed care organizations, accounted for as an equity method investment.

Business Outlook and Trends

Our performance is affected by a number of trends that drive the demand for our services. In particular, the markets in which we operate are exposed to various trends such as healthcare industry and demographic dynamics in the United States (“U.S.”) and international government outsourcing and employment dynamics. Over the long term, we believe there are numerous factors that could affect growth within the industries in which we operate, including:
an aging population, which will increase demand for healthcare services;
a movement towards value-based, versus fee for service, care and budget pressure on governments, both of which may increase the use of private corporations to provide necessary and innovative services;
increasing demand for in-home care provision, driven by cost pressures on traditional reimbursement models and technological advances enabling remote engagement;
technological advancements, which may be utilized by us to improve service and lower costs and by others, which may increase industry competitiveness;
changes in UK government policy, such as decreased volumes in future welfare-to-work programs, specifically through the UK’s Work and Health Programme, which will have a reduced scope and reduced funding compared with the prior programs;
the results of the referendum on the UK’s exit from the European Union and related political and economic uncertainty in the UK; and
the U.S. federal government's expressed intent to repeal the Patient Protection and Affordable Care Act and replace such law with an alternative proposal. The details of both the extent of the provisions that may be repealed as well as the details of any potential replacement legislation are uncertain at this time. Enactment of adverse legislation, regulation or agency guidance, may reduce the demand for our services, our ability to conduct some or all of our business and/or reimbursement rates for services performed within our segments.


24



Historically, our segments have grown through organic expansion into new markets and service lines, organic expansion within existing markets and service lines, increases in the number of members served under contracts we have been awarded, the securing of new contracts, and acquisitions. As we continue to focus our attention and capital on our domestic, healthcare services operations ("U.S. Healthcare Services"), we may pursue the acquisition of attractive businesses that are complementary to our U.S. Healthcare Services. In addition, as evidenced by the 2016 Matrix Transaction (as defined below), we may also enter into strategic partnerships if we feel this provides the best opportunity to maximize shareholder value. The pursuit of our strategy may also result in the disposition of current or future investments, as demonstrated in 2017 with our sale of our equity investment in Mission Providence and in 2015 with the sale of our Human Services segment. In coming to these determinations, we base our decisions on a variety of factors, including the availability of alternative opportunities to deploy capital, maximize shareholder value or other strategic considerations. Furthermore, the Company typically incurs costs related to merger and acquisition activities, including third-party costs, whether the transaction is completed or not.

Critical accounting estimates and policies

As of September 30, 2017, there has been no change in our critical accounting policies, other than for stock-based compensation and recoverability of goodwill, as discussed below. For further discussion of our critical accounting policies, see management’s discussion and analysis of financial condition and results of operations contained in our Form 10-K for the year ended December 31, 2016.

Stock-Based Compensation

Our primary forms of employee stock-based compensation are stock option awards and restricted stock awards, including certain awards which vest based upon performance conditions. We measure the value of stock option awards on the date of grant at fair value using the appropriate valuation techniques, including the Black-Scholes and Monte Carlo option-pricing models. We recognize the fair value as stock-based compensation expense on a straight-line basis over the requisite service period, which is typically the vesting period. The pricing models require various highly judgmental assumptions including volatility and expected option term. If any of the assumptions used in the models change significantly, stock-based compensation expense may differ materially in the future from that recorded in the current period.

As a result of the adoption of Accounting Standards Update (“ASU”) No. 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting (“ASU 2016-09”), effective January 1, 2017, we no longer record stock-based compensation expense net of estimated forfeitures and the tax effects of awards are treated as discrete items in the period in which tax windfalls or shortfalls occur. The adoption also impacted the presentation of cash flows and the computation of earnings per share.

The adoption of ASU 2016-09 will subject our tax rate to quarterly volatility from the effects of stock award exercises and vesting activities, including the adverse impact on our income tax provision for awards which result in a tax deduction less than the amount recorded for financial reporting purposes based upon the fair value of the award at the grant date. For example, no shares will be distributed under the Company’s 2015 Holding Company LTI Program (the “HoldCo LTIP”) unless the volume weighted average of Providence’s stock price over a 90-day period ending on December 31, 2017 exceeds $56.79. If this market condition is not satisfied, a significant tax shortfall will result, causing an adverse impact on our tax provision.

Recoverability of Goodwill

Goodwill. In accordance with ASC 350, Intangibles-Goodwill and Other, we review goodwill for impairment annually, or more frequently, if events and circumstances indicate that an asset may be impaired. Such circumstances could include, but are not limited to: (1) the loss or modification of significant contracts, (2) a significant adverse change in legal factors or in business climate, (3) unanticipated competition, (4) an adverse action or assessment by a regulator, or (5) a significant decline in the Company’s stock price. We perform the annual goodwill impairment test for all reporting units as of October 1.

First, we perform qualitative assessments for each reporting unit to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment suggests that it is more likely than not that the fair value of a reporting unit is less than its carrying value amount, we then perform a quantitative assessment and compare the fair value of the reporting unit to its carrying value.


25



We adopted ASU No. 2017-04, Intangibles-Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”) effective April 1, 2017. ASU 2017-04 removes the requirement to compare the implied fair value of goodwill with its carrying amount as part of step two of the goodwill impairment test. Instead, if we deem it necessary to perform the quantitative goodwill impairment test in an annual or interim period, we recognize an impairment charge equal to the excess, if any, of a reporting unit’s carrying amount over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit.

Results of operations

Segment reporting. Our operations are organized and reviewed by management along our segment lines. We operate in two principal business segments: NET Services and WD Services. Our investment in CCHN Group Holdings, Inc. and its subsidiaries (“Matrix”) is also a reportable segment referred to as the “Matrix Investment”.

On October 19, 2016, affiliates of Frazier Healthcare Partners purchased a 53.2% equity interest in Matrix, with Providence retaining a 46.8% equity interest (the “Matrix Transaction”), resulting in our ownership of a noncontrolling interest (46.6% as of September 30, 2017) in our historical Health Assessment Services (“HA Services”) segment. The HA Services segment results of operations for the periods through October 19, 2016 are separately discussed in the “Discontinued operations, net of tax” section set forth below. The results of operations for periods subsequent to October 19, 2016 are separately discussed in the “Equity in net loss of investees” section set forth below. Additionally, effective November 1, 2015, we completed the sale of our Human Services segment. The Human Services segment results of operations are separately discussed in the “Discontinued operations, net of tax” section set forth below. Subsequent to the sale of our Human Services segment, we have incurred additional expenses in certain periods related to the settlement of indemnification claims and associated legal costs, which are recorded to “Discontinued operations, net of tax”.

Segment results are based on how our chief operating decision maker manages our business, makes operating decisions and evaluates operating performance. The operating results of the two principal business segments include revenue and expenses incurred by the segment, as well as an allocation of certain direct expenses incurred by our corporate division on behalf of the segment. Indirect expenses, including unallocated corporate functions and expenses, such as executive, finance, accounting, human resources, insurance administration, internal audit, process improvement, information technology and legal, as well as the results of our captive insurance company (the “Captive”) and elimination entries recorded in consolidation are reflected in “Corporate and Other”.


26



Q3 2017 compared to Q3 2016

Consolidated Results. The following table sets forth results of operations and the percentage of consolidated total revenues represented by items in our unaudited condensed consolidated statements of income for Q3 2017 and Q3 2016 (in thousands):
 
Three months ended September 30,
 
2017
 
2016
 
$
 
Percentage
of Revenue
 
$
 
Percentage
of Revenue
Service revenue, net
409,517

 
100.0
%
 
412,271

 
100.0
%
 
 
 
 
 
 
 
 
Operating expenses:
 
 
 
 
 
 
 
Service expense
378,032

 
92.3
%