Youth Services International Inc., an Owings Mills-based operator of residential programs for troubled youths, said yesterday that it is bailing out of its behavioral health business because of insurance cutbacks and a dwindling number of patients.
The move will shrink the company's annual revenues from $120 million to $80 million, though YSI officials say that planned expansions of the juvenile justice division could push revenues to $100 million by the end of 1998.
"We're focusing the company entirely in juvenile justice and, with the efficiencies that come from exiting the behavioral business, we are going to quadruple the after-tax performance of the company," said Timothy P. Cole, Youth Services' chief executive officer.
The Owings Mills company said it will take a charge in its third-quarter ended March 31 of $27 million, or $2.28 to $2.31 a share, from the anticipated sale of nine programs with a total of 803 licensed beds.
The company will continue to operate 13 juvenile justice programs, consisting of 1,773 beds, including the Charles H. Hickey Jr. School in Baltimore County, which it operates under a contract from Maryland's Juvenile Services Department.
"It's a very positive long-term development for the company," said Timothy J. Dwyer, an analyst for A. G. Edwards and Sons of St. Louis. "I think it's a very prudent move, a very difficult decision."
The company's operation currently is divided into residential programs for youths who have been placed there by the courts and those for youths with behavioral problems who have not been adjudicated.
Cole said the behavioral programs suffered from the reluctance of agencies to place troubled children in residential programs and from a decrease in coverage by insurance companies.
The sale will include recently acquired businesses -- including two operations serving troubled youths in the Southwest and another in Florida -- that have performed badly even after significant cost reductions, Cole said.
"These were acquired businesses not returning the financial rewards we anticipated," he said. "It was dragging the whole business down. This is a strategic decision to exit a market that is only going to get worse."
The announcement, however, pushed TSI's stock down $1.875 to a 52-week low of $11.125 yesterday on the Nasdaq. The stock has declined over the past year, falling from a high of $29.25 on May 28.
"It's painful in the short-term because of the large operating charge and the fact they're divesting recently acquired businesses," said Kurt Funderburg, an analyst for Ferris Baker Watts in Baltimore. "But overall, it's a good move for the company and for the stockholders."
For the quarter ended March 31, the company expects to record a loss of $2.28 to $2.31 a share. Excluding the write-down for the sale of the behavioral health business, the company estimates that earnings would have been 3 cents to 6 cents a share.
Dwyer said he has lowered YSI's earnings projection for fiscal 1998 from 70 cents to 50 cents. "That's not reflective of the business environment or prospects for their core juvenile justice behavioral business," he said.
Youth Services was established by Jiffy Lube founder W. James Hindman, who was succeeded last August as chief executive officer by Cole, former chairman of Wackenhut Corrections Corp., a Florida-based manager and developer of private prisons and jails.
"They had gotten into the [behavioral] business largely through acquisitions," Dwyer said. "It's not that uncommon for new management to come in, evaluate and then put their thumbprint on the company."
Pub Date: 4/22/97