America Service Group Inc. (ASGR)

Q2 2010 Earnings Conference Call

July 30, 2010 11:00 AM ET

Executives

Rich Hallworth – President and CEO

Mike Taylor – EVP and CFO

Jon Walker – SVP, Business Development

Analysts

Kevin Campbell – Avondale Partners

Michael Lamb – Wealth Monitors

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the America Service Group’s second quarter 2010 conference call. During the presentation all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer session. (Operator Instructions)

As a reminder, this conference is being recorded today Friday, July 30, 2010. I would now like to turn the conference over to Mr. Rich Hallworth, President and CEO of the America Service Group. Please go ahead sir.

Rich Hallworth

Thank you (Tunica). Good morning everyone. Welcome to our second quarter 2010 earnings call. A copy of our press release addressing our second quarter results can be found on our website, www.asgr.com.

Today Mike Taylor, Jon Walker and I are making this call from Chicago. We hope the telephone technology behind this broadcast call will not cause any problems for all of you. I’m pleased with our performance again this quarter.

Margins for the second quarter were well within our expectations despite having to overcome unanticipated charges of over $800,000. Those charges were incurred due to some corporate restructuring we had not anticipated in our forecasts and the accelerated vesting of some restricted stock grants.

There was an opportunity to vest certain shares granted in March of 2009 early if the stock price increased 56% from the market price when the stock was granted. That improvement was realized in a 15-month period following the grant. After recording those charges our actual financial results for the second quarter, like the first quarter were better than we had anticipated.

This has given us the confidence to again increase our full-year pro forma net income guidance. Our balance sheet continues to be very strong. We ended the quarter $29.7 million of cash on hand and we still have no debt. While this is down $11.8 million from the $41.5 million of cash on hand at the end of the first quarter, it is after paying out over $14 million for two legal matters.

We had previously accrued and disclosed those matters and if you will recall we informed investors earlier this year that these cash payments would be required during the course of 2010. Our day sales outstanding improved slightly from 28 days at the end of the first quarter to 27 days at June 30.

Since our last call, the RFP pipeline continues to be very active and strong. I commented last quarter that we had new bids pending or in process in excess of $370 million of annual revenue potential. That new business pending or in process pipeline is now estimated at $450 million. At the time of the last call, we had anticipated that a few of the key opportunities in this pipeline would have been awarded by now.

Unexpectedly, Arizona DOC, Maryland DOC and the Miami-Dade County RFPs have been delayed during the RFP process. These delays cause them to remain in the current $450 million estimate and we have no reason to believe they will not be awarded. The increase in the estimated pipeline from the prior quarter is the result primarily of the Illinois DOC which released an RFP for comprehensive healthcare services within last two weeks.

For current clients our proposal to continue to serve Rikers Island in New York City upon the December 31, 2010 expiration of our current contract is our only material contract with a contractual expiration this year. There has been no award made under that RFP.

In addition to this active proposal pipeline we are still expecting several more opportunities in the near future. Over the next 12 months we anticipate additional requests for proposal with $300 million in additional annual revenue potential including the Georgia and Mississippi DOCs among others.

There is no guarantee that these RFPs will be issued or awarded, nor can we assure you that we will bid on each of them. As announced in yesterday’s press release, our Board of Directors has again declared a $0.06 per share dividend for the quarter. In summary, we are pleased with the progress the company is making and our financial results are a good reflection of that progress.

I’d now like to ask Mike Taylor, our Executive Vice President and Chief Financial Officer to speak in more detail about financial matters. Following Mike’s remarks Jon Walker, our Senior Vice President of Business Development will also be available for questions.

Mike Taylor

Thank you Rich, good morning everyone. The company’s second quarter financial results continuous straining of strong recent performance. Although down somewhat from excellent first quarter levels, gross margins on continuing contracts was a solid 8.4% in the second quarter, significantly improved from 7.5% in the prior year quarter.

Adjusted EBITDA of $5.7 million in the second quarter was above expectations and we’ve grown more positive on the full year outlook raising our guidance to $25.5 million for the full-year. Net income of $1.9 million in the second quarter was strong in light of the fact we had to overcome over $800,000 of expenses related to corporate restructuring and the impact of vesting acceleration of some restricted stock grants. As anticipated our cash balances drops somewhat during the second quarter, reflecting certain legal matter payments of $14.1 million in the second quarter.

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