Youth Services Q4
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Youth Services Q4
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(FOOL CONFERENCE CALL SYNOPSIS)* By Dale Wettlaufer (MF Raleigh)
Youth Services International <% if gsSubBrand = "aolsnapshot" then Response.Write("(NASDAQ:YSII)") else Response.Write("(NASDAQ:YSII)") end if %> (Editor's note) The company's press release did not appear on the wires. Therefore, we have included a summary of financials and encourage anyone interested to call the company for the full release). 1996 1995
Shr primary loss $0.02 $0.10 profit
Shr diluted profit 0.01 n/a
Net loss 238 860 profit
Revenues 22,946 15,409
Avg shares primary 9,794 8,319
Avg shares diluted 12,901 n/a
12 MONTHS
Shr primary profit $0.25 $0.26 profit
Shr diluted profit 0.26 n/a
Net profit 2,271 2,179 profit
Revenues 84,222 52,825
Avg shares primary 9,267 8,265
Avg shares diluted 10,936 n/a
(All Data Above 000s Except Per Share Numbers)
Management Discussion The company recorded a $0.04 per share charge for the Three Springs transaction. The company's income tax provision for the quarter was $0.02 per share higher than anticipated, primarily due to the inability of the company to take an income tax benefit from Introspect's losses for the year since the company was managing it under a management contract.
Tim Cole: "We have these one-time charges behind us, we have a tremendously competent management team on board, and that's both at corporate and in the field." We have an industry that has truly boundless opportunities, and the people in this company have a personal and collective commitment to develop solutions, rather than treat symptoms. Our corporate and field organization will become more efficient over the short-term, which is something I'm devoting an extra amount of time to in the short-term. The operating expense and overhead leveraging is an issue that we're also working on to increase the overall efficiency of the company, and we are working hard to broaden our offerings in areas such as the design, finance, and operation of the juvenile facilities that we're seeing in Virginia and Michigan and elsewhere. Also we're working on some family-centered and community-based service offerings to expand what we offer to existing clients as well as potential clients. The overall prospects in this company are simply outstanding -- the opportunities are more plentiful than we have ever seen before. We're extremely optimistic about the prospects of this company moving forward."
Q&A
The Introspect tax change caused the effective tax rate to increase by a penny per share while there were some tax charges taken, which account for the other penny per share, which relate to past acquisitions. The Introspect acquisition cost an extra dime per share, which was made up of the penny in higher taxes mentioned as well as a $0.10 operating loss.
Program expenses rose year/year by a rate slightly higher than the revenues increase over the same period. Program expenses are actually under control, but there were $500,000 in extra expenses related to consulting fees associated with the Introspect transaction that did not appear in 1995. Backing out those expenses, same-store program expenses were in line with expectations.
The company has multiple RFPs (request for proposals -- contracts on which Youth Services will bid). These include: One for a 110 bed Georgia facility; one for a 225 bed Virginia facility; one is due to be released for a 480 bed facility; two in Florida in Dade and Broward Counties. The company anticipates seeing additional RFPs for Florida facilities due to the federal Crime Bill money that is not filtering down to the state level. There is well over 1,000 beds in RFPs that have been released or will soon be released. An equal amount of RFPs could emerge within the next four months. The pipeline is starting to fill, and in some cases these contracts require the bidder to design and build facilities. Other contracts require the bidder to take over and/or renovate existing state facilities. The company believes that more and more government entities, state or county, will be issuing RFPs in the near future.
Design/build/finance RFPs take over 90 days to get into the final stages of approval. Georgia and Virginia should announce their selections within 60 days. The competitors on these larger contracts are probably Correction Corp., Wackenhut, Corrections Services, and perhaps US Corrections though USC's youth credentials are not up to par with the others'. Because of the amount of RFPs coming out and the design/build attractiveness, the youth corrections market is growing and becoming attractive as a growth market for some of these larger corporations. The company believes that it has the best credentials in the youth corrections market. It's design/finance/build capabilities are "the equal of anybody."
The Introspect transaction closed the day before YS reported earnings. At that time, YSI retired that company's high interest $10.3 million debt. For the first quarter, that unit's profitability will come down somewhat. For the coming year, YSI expects Introspect to have revenues of $60 million with pre-tax margin of $1.6 million including a $600,000 goodwill charge. YSI expects Introspect to add $0.02-0.04 to EPS in FY97 over what YSI had previously expected with the management agreement. There should be some negative impact for the September quarter, but that is planned to be made up in the rest of the fiscal year. Under the management agreement, pre-tax profits would have been $800,000, so owning it outright adds twice that to YSI's pre-tax bottom line.
Tax rate going forward should be 40%, book rate.
There are three ways by which YSI intends to expand the business: RFPs; the deNovos project; and the Tarchio/East projects. These are noncompetitive projects that will add immediate accretive benefits to earnings when brought online. From an acquisition standpoint, there are always opportunities to look at, with the fragmentation in the industry. Acquisition targets would include larger facilities because of the economies of scale that they may offer. In addition, the company would look at markets where facilities' services are similar and markets where the company could build share. The company is working on projects such as a 500 bed facility in the mid-Atlantic region, a 250 bed in the northern midwest, and another in a major northeastern state. If all those projects were brought in, that would add 1,000 beds to YSI's total facilities. Projects such as Tarchio add a lot of costs on the front-end, so an attractive acquisition is always a possibility. However, YSI always expenses those costs in the period they are incurred, so the P&L reflects such set up costs in one period, making future income statements cleaner. Best guess is that YSI would do two deNovo type projects in the next six months.
Where the company could win government grants or partnerships, or where the company could negotiate good deals with land owners, the company's expenditures for new facilities would be equal to, or possibly lower than, past deals. The company is going in a direction in which they will be doing more development activities. There will be an officer devoted to these activities, which will result in a clearer focus on projects that present the most immediate value to the company, projects that can be consummated more quickly, and which would result in projects like Three Springs.
Tarchio took $1.2 million in leasehold improvements to get the investment going and also took almost $900,000 in operating expenses, or losses, before it started to break even. That facility is 300 beds. Almost one year later, Tarchio achieved almost $11 million in revenues and added program contribution margin of $2.1 million.
24 beds in Tuscon have been filled and will show up as such in the company's facilities census. Beds have been added at Tarchio in the first quarter. Some after-care and community service people have been added which are not included in the count of residential capacity. The end of the third quarter will not look that different than the end of the fiscal year. In addition, many of YSI's customers have requested non-bed facilities, which will affect the growth rate of capacity census. New services include day-treatment, school-type programs and case management services.
YSI took its option in Tuscon because they had formerly operated the facility under a management agreement under which they believe that the former board of directors there chose operating policies which were not cost efficient. There were therefore cost advantages to taking over the facility and also adding an integrated line of services there. Over the year, the company has been successful in achieving the addition of services and believes that it can go on to accomplish the goal of reducing costs this year. The facility is now 140 beds whereas there were only 104 when they acquired it. YSI has "dislocated the sellers from their lavish corporate offices" and is in the process of converting that space to 24 beds for students, which will up capacity to about 165. YSI provides services for 40 days students and does case management for 1,600 youths, of which only 44 are currently in the residential setting. Much of its income is coming from non-institutional services.
The company is not experiencing price pressures and nothing unusual is happening with core, operating margins outside of some of the expenses that are consumed in pre-RFP work and also in the time lag between a contract award for a design/build/finance contract and the start-up of such facilities. * A Fool conference call synopsis represents an effort to highlight the salient points of a conference call and should not be taken as an authoritative accounting or transcription of the entire event. |
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Copyright 1996, The Motley Fool |