TMCnet News
ADDUS HOMECARE CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion together with our unaudited condensed consolidated financial statements and the related notes. This discussion contains forward-looking statements about our business and operations. Our actual results may differ materially from those we currently anticipate. Overview We are a comprehensive provider of home and community based services to over 32,000 consumers through a network of 132 locations in 22 states. Our services are primarily performed in the homes of consumers and include assistance to the elderly, chronically ill and disabled with bathing, grooming, dressing, personal hygiene and medication reminders and other activities of daily living. Home and community based services are primarily performed under agreements with state and local government agencies and, increasingly, managed care organizations. Effective March 1, 2013, we sold substantially all of the assets used in our home health business (the "Home Health Business") in Arkansas, Nevada and South Carolina, and 90% of the Home Health Business in California and Illinois, to subsidiaries of LHC Group, Inc. ("LHCG") for a cash purchase price of approximately $20,000,000. We retained a 10% ownership interest in the Home Health Business in California and Illinois. The assets sold included 19 home health agencies and two hospice agencies in five states. On December 30, 2013 we sold one home health agency in Pennsylvania for approximately $200,000. In November 2012, we ceased operations of a home health agency located in Idaho and abandoned efforts to sell this location in December 2013. Through our former home health agencies, we previously provided physical, occupational and speech therapy, as well as skilled nursing services, to pediatric, adult infirm and elderly patients. The results of the Home Health Business sold or held for sale are reflected as discontinued operations for all periods presented herein. Continuing operations include the results of operations previously included in our home & community segment and three agencies previously included in our home health segment. Following the sale of the Home Health Business, we manage and internally report our business in one segment. We believe the sale of the Home Health Business positioned us for future growth by allowing us to focus both management and financial resources on changes in the home and community based services industry and the needs of managed care organizations as they become increasingly responsible for state sponsored programs. We have improved our overall financial position by eliminating our debt and adding substantial amounts in cash reserves to our balance sheet. A summary of our results for the three and nine months ended September 30, 2014 and 2013 are provided in the tables below: For the Three Months Ended September 30, (Amounts in Thousands) 2014 2013 Net service revenues - continuing operations $ 81,658 $ 67,306 Net service revenues - discontinued operations - - Net income from continuing operations 3,237 2,770 Earnings from discontinued operations - (203 ) Net income $ 3,237 $ (2,567 ) Total assets $ 175,347 $ 156,717 For the Nine Months Ended September 30, (Amounts in Thousands) 2014 2013 Net service revenues - continuing operations $ 230,306 $ 196,059 Net service revenues - discontinued operations - 6,475 Net income from continuing operations 8,320 8,039 Earnings from discontinued operations - 10,221 Net income $ 8,320 $ 18,260 Total assets $ 175,347 $ 156,717 The home and community based services we provide are primarily social in nature and include assistance with bathing, grooming, dressing, personal hygiene and medication reminders, and other activities of daily living. We provide these services on a long-term, continuous basis, with an average duration of approximately 17 months per consumer. Our adult day centers provide a comprehensive program of skilled and support services and designated medical services for adults in a community-based group setting. Services provided by our adult day centers include social activities, transportation services to and from the centers, the provision of meals and snacks, personal care and therapeutic activities such as exercise and cognitive interaction. We utilize a coordinated care model that is designed to enhance consumer outcomes and satisfaction, reduce the need for, and thus lower the cost of, acute care treatment and reduce service duplication. Through our coordinated care model, we utilize our home care aides to observe and report changes in the condition of our consumers for the purpose of early intervention in the disease process, thereby preventing or reducing the cost of medical services by avoiding emergency room visits, and/or reducing the need for hospitalization. Changes in consumers' conditions are evaluated by appropriately trained managers and referred to appropriate medical personnel including the consumers' primary care physicians and managed care plans for treatment and follow-up. We also coordinate the services provided by our team with those of other health care agencies. We believe this approach to the care to our consumers and the integration of our services into the broader healthcare industry is particularly attractive to managed care providers and others who are ultimately responsible for the healthcare needs of our consumers and related costs. 16-------------------------------------------------------------------------------- Table of Contents Our ability to grow our net service revenues is closely correlated with the number of consumers to whom we provide services. Our growth depends on our ability to maintain existing payor client relationships, establish relationships with new payors, enter into new contracts and increase referral sources. Our growth is also dependent upon the authorization by state agencies of new consumers to receive our services. We believe there are several market opportunities for growth. The U.S. population of persons aged 65 and older is growing, and the U.S. Census Bureau estimates that this population will more than double by 2050. Additionally, we believe the overwhelming majority of consumers in need of care generally prefer to receive care in their homes or community-based settings. Finally, we believe the provision of home and community based services is more cost-effective than the provision of similar services in an institutional setting for long-term care. We have historically grown our business through organic growth in existing service areas and the expansion into new service areas, complemented by selective acquisitions. We target our acquisitions on entry into new states with a particular focus on states converting their Medicaid programs to managed care and secondarily to increase our market position in existing states. Effective June 1, 2014, we acquired Cura Partners, LLC, which conducts business under the name Aid & Assist at Home, LLC ("Aid & Assist"), in order to further expand our presence in the State of Tennessee. The total consideration for the transaction was $8,206,000, comprised of $7,186,000 in cash and $1,020,000, which has not yet been paid, representing the estimated fair value of future cash consideration subject to the achievement of certain performance targets set forth in an earn-out agreement. The related acquisition costs were $543,000 and were expensed as incurred. The results of operations from this acquired entity are included in our Statements of Income from the date of the acquisition. We acquired two home and community based businesses during 2013 and the first quarter of 2014 to further our presence in both existing states and to expand into new states. On November 1, 2013 we acquired two agencies located in South Carolina from the Medi Home Private Care Division of Medical Services of America, Inc. On January 24, 2014, we acquired an additional four agencies located in Tennessee and two agencies located in Ohio from the Medi Home Private Care Division of Medical Services of America, Inc. On December 1, 2013 we acquired the assets of Coordinated Home Health Care, LLC, a personal care business located in New Mexico, which included sixteen offices located in southern New Mexico. The combined purchase price for the foregoing acquisitions was $12,325,000 paid at closing and a maximum of $2,250,000 in future cash consideration based on certain performance criteria. The related acquisitions costs totaled $660,000 and were expensed as incurred. The results of operations from these acquired entities are included in our Statements of Income from the dates of the respective acquisitions. Business The results of the Home Health Business sold are reflected as discontinued operations for all periods presented herein. Continuing operations include the results of operations previously included in our home & community segment and three agencies previously included in our home health segment. Following the sale of the Home Health Business, we manage and internally report our business in one segment. As of September 30, 2014, we provided our home and community based services in 132 locations across 22 states. As of December 31, 2013, we provided our home and community based services in 121 locations across 21 states. Our payor clients are principally federal, state and local governmental agencies and, increasingly, managed care organizations. The federal, state and local programs under which the agencies operate are subject to legislative, budgetary and other risks that can influence reimbursement rates. Our commercial insurance carrier payor clients are typically for-profit companies and are continuously seeking opportunities to control costs. We are beginning to experience and anticipate a further transition of business from government payors to managed care organizations with which we are seeking to grow our business given our emphasis on coordinated care and the prevention of unnecessary costly acute care. Managed care payors are commercial insurance carriers who are under contract with various federal and state governmental agencies to manage the provision of home and community based services. Their objective is to lower total health care costs by integrating the provision of home and community based services with those benefit programs responsible for the provision of acute care services to their consumers. We are also seeking to grow our private duty business. For the three and nine months ended September 30, 2014 and 2013 our payor revenue mix for continuing operations was: Three Months Ended Nine Months Ended September 30, September 30, 2014 2013 2014 2013 State, local and other governmental programs 85.9 % 94.0 % 88.6 % 94.0 % Managed care 9.5 1.0 6.8 0.5 Private duty 3.5 4.0 3.5 4.0 Commercial 1.1 1.0 1.1 1.5 100.0 % 100.0 % 100.0 % 100.0 % We derive a significant amount of our net service revenues from our continuing operations in Illinois, which represented 60.0% and 66.0% of our total net service revenues from continuing operations for the three months ended September 30, 2014 and 2013, respectively. Net service revenues from our operations in Illinois represented 60.8% and 65.8% of our total net service revenues for the nine months ended September 30, 2014 and 2013, respectively. A significant amount of our net service revenues from continuing operations are derived from one payor client, the Illinois Department on Aging, which accounted for 52.1% and 58.9% of our total net service revenues from continuing operations for the three months ended September 30, 2014 and 2013, respectively. The Illinois Department of Aging accounted for 53.7% and 59.1% of our total net service revenues from continuing operations for the nine months ended September 30, 2014 and 2013, respectively. We measure the performance of our business using a number of different metrics, including billable hours, billable hours per business day, revenues per billable hour and the number of consumers, or census. Components of our Statements of Income Net Service Revenues We generate net service revenues from continuing operations by providing our services directly to consumers. We receive payment for providing such services from our payor clients, including federal, state and local governmental agencies, commercial insurers and private consumers. 17-------------------------------------------------------------------------------- Table of Contents Net service revenues from continuing operations are typically generated based on services rendered and reimbursed on an hourly basis. Our net service revenues from continuing operations were generated principally through reimbursements by state, local and other governmental programs which are partially funded by Medicaid programs, and to a lesser extent from private duty and insurance programs. Net service revenues from continuing operations are principally provided based on authorized hours, determined by the relevant agency, at an hourly rate, which is either contractual or fixed by legislation, and recognized as net service revenues at the time services are rendered. Cost of Service Revenues We incur direct care wages, payroll taxes and benefit-related costs from continuing operations in connection with providing our services. We also provide workers' compensation and general liability coverage for these employees. Employees are also reimbursed for their travel time and related travel costs. General and Administrative Expenses Our general and administrative expenses from continuing operations consist of expenses incurred in connection with our activities and as part of our central administrative functions. Our general and administrative expenses from continuing operations consist principally of supervisory personnel, care coordination and office administration costs. These expenses include wages, payroll taxes and benefit-related costs; facility rent; operating costs such as utilities, postage, telephone and office expenses; and bad debt expense. We have initiated efforts to centralize administrative tasks currently conducted at the branch locations. The costs related to these initiatives are included in the general and administrative expenses from continuing operations. Other centralized expenses from continuing operations include administrative departments of accounting, information systems, human resources, billing and collections and contract administration, as well as national program coordination efforts for marketing and private duty. These expenses primarily consist of compensation, including stock-based compensation, payroll taxes, and related benefits; legal, accounting and other professional fees; rents and related facility costs; and other operating costs such as software application costs, software implementation costs, travel, general insurance and bank account maintenance fees. Depreciation and Amortization Expenses We amortize our intangible assets with finite lives, consisting of customer and referral relationships, trade names, trademarks and non-compete agreements, principally on accelerated methods based upon their estimated useful lives. Depreciable assets consist principally of furniture and equipment, network administration and telephone equipment, and operating system software. Depreciable and leasehold assets are depreciated or amortized on a straight-line method over their useful lives or, if less and if applicable, their lease terms. Interest Income Legislation enacted in Illinois entitles designated service program providers to receive a prompt payment interest penalty based on qualifying services approved for payment that remain unpaid after a designated period of time. As the amount and timing of the receipt of these payments are not certain, the interest income is recognized when received and reported in the statement of operations as interest income. While we may be owed additional prompt payment interest, the amount and timing of receipt of such payments remains uncertain and we have determined that we will continue to recognize prompt payment interest income when received. Interest Expense Interest expense from continuing operations consists of interest costs on our credit facility and other debt instruments. Income Tax Expense All of our income from continuing operations is from domestic sources. We incur state and local taxes in states in which we operate. The differences from the federal statutory rate of 35.0% in 2014 and 2013 are principally due to state taxes and the use of federal employment tax credits. Discontinued Operations Discontinued operations consists of the results of operations, net of tax for our Home Health Business that was sold effective March 1, 2013, the results of operations for an agency in Pennsylvania that was sold on December 30, 2013 and an agency in Idaho that was closed in November 2012. 18-------------------------------------------------------------------------------- Table of Contents Results of Operations The following tables set forth, for the periods indicated, our unaudited consolidated results of operations. Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013 For the Three Months Ended September 30, 2014 2013 Change % of % of Net Service Net Service Amount Revenues Amount Revenues Amount % (Amounts in Thousands, Except Percentages) Net service revenues $ 81,658 100.0 % $ 67,306 100.0 % $ 14,352 21.3 % Cost of service revenues 59,818 73.3 50,080 74.4 9,738 19.4 Gross profit 21,840 26.7 17,226 25.6 4,614 26.8 General and administrative expenses 15,773 19.3 12,424 18.5 3,349 27.0 Depreciation and amortization 1,106 1.4 539 0.8 567 105.2 Total operating expenses 16,879 20.7 12,963 19.3 3,916 30.2 Operating income from continuing operations 4,961 6.1 4,263 6.3 698 16.4 Interest income (8 ) - (183 ) (0.3 ) 175 Interest expense 188 0.2 159 0.2 29 Total interest expense, net 180 0.2 (24 ) - 204 (850.0 ) Income from continuing operations before income taxes 4,781 5.9 4,287 6.4 494 11.5 Income tax expense 1,544 1.9 1,517 2.3 27 1.8 Net income from continuing operations 3,237 4.0 2,770 4.1 467 16.9 Discontinued operations: Earnings from Home Health Business, net of tax - - (203 ) (0.3 ) 203 (100.0 ) Net income $ 3,237 4.0 % $ 2,567 3.8 % $ 670 26.1 % Business Metrics (Actual Numbers, Except Billable Hours in Thousands) Average billable census 32,032 27,058 4,974 18.4 % Billable hours 4,794 3,941 853 21.6 Average Billable hours per census per month 50 49 1 2.0 Billable hours per business day 74,912 59,735 15,177 25.4 Revenues per billable hour $ 17.03 $ 17.08 $ (0.05 ) (0.3 )% Net service revenues from state, local and other governmental programs accounted for 85.9% and 94.0% of net service revenues for the three months ended September 30, 2014 and 2013, respectively. Managed care, private duty and commercial payors accounted for the remainder of net service revenues. Net service revenues increased $14,352,000, or 21.3%, to $81,658,000 for the three months ended September 30, 2014 compared to $67,306,000 for the same period in 2013. The increase was primarily due to an 18.4% increase in average billable census, of which 41.1% is same store census growth and 58.6% is related to acquisitions. Gross profit, expressed as a percentage of net service revenues, increased to 26.7% for the third quarter of 2014, compared to 25.6% the same period in 2013. The increase was primarily due to lower than anticipated workers' compensation expense and recent acquisitions providing higher margins. General and administrative expenses, expressed as a percentage of net service revenues increased to 19.3% for the three months ended September 30, 2014, from 18.5% for the three months ended September 30, 2013. General and administrative expenses increased to $15,773,000 as compared to $12,424,000 for the three months ended September 30, 2014 and 2013, respectively. The increase in general and administrative expenses was due to an increase in the general and administrative costs related to acquisitions and increased expenditures related to information technology, consulting expenses and Sarbanes-Oxley compliance efforts for the three months ended September 30, 2014 as compared to 2013. Depreciation and amortization, expressed as a percentage of net service revenues, increased to 1.4% for the third quarter of 2014, from 0.8% for the same period in 2013. Amortization of intangibles, which are principally amortized using accelerated methods, totaled $710,000 and $339,000 for the three months ended September 30, 2014 and 2013, respectively. 19-------------------------------------------------------------------------------- Table of Contents Nine months Ended September 30, 2014 Compared to Nine months Ended September 30, 2013 For the Nine Months Ended September 30, 2014 2013 Change % of % of Net Service Net Service Amount Revenues Amount Revenues Amount % (Amounts in Thousands, Except Percentages) Net service revenues $ 230,306 100.0 % $ 196,059 100.0 % $ 34,247 17.5 % Cost of service revenues 169,218 73.5 146,422 74.7 22,796 15.6 Gross profit 61,088 26.5 49,637 25.3 11,451 23.1 General and administrative expenses 45,576 19.8 36,026 18.4 9,549 26.5 Depreciation and amortization 2,684 1.2 1,626 0.8 1,058 65.1 Total operating expenses 48,260 21.0 37,652 19.2 10,607 28.2 Operating income from continuing operations 12,828 5.6 11,985 6.1 844 7.0 Interest income (16 ) - (183 ) (0.1 ) 168 Interest expense 500 0.2 509 0.3 (9 ) Total interest expense, net 484 0.2 326 0.2 159 48.8 Income from continuing operations before income taxes 12,344 5.4 11,659 5.9 685 5.9 Income tax expense 4,024 1.7 3,620 1.8 404 11.2 Net income from continuing operations 8,320 3.6 8,039 4.1 281 3.5 Discontinued operations: Earnings from Home Health Business, net of tax - - 10,221 5.2 (10,221 ) (100.0 ) Net income $ 8,320 3.6 % $ 18,260 9.3 % $ (9,940 ) (54.4 )% Business Metrics (Actual Numbers, Except Billable Hours in Thousands) Average billable census 32,753 26,411 6,342 24.0 % Billable hours 13,511 11,517 1,994 17.3 Average Billable hours per census per month 46 48 (2 ) (4.2 ) Billable hours per business day 70,737 59,107 11,630 19.7 Revenues per billable hour $ 17.05 $ 17.02 $ 6.98 69.3 % Net service revenues from state, local and other governmental programs accounted for 88.6% and 94.0% of net service revenues for the nine months ended September 30, 2014 and 2013, respectively. Managed care, private duty and commercial payors accounted for the remainder of net service revenues. Net service revenues increased $34,247,000, or 17.5%, to $230,306,000 for the nine months ended September 30, 2014 compared to $196,059,000 for the same period in 2013. The increase was primarily due to a 17.3% increase in average billable census, of which 67.1% is same store census growth and 32.9% is related to acquisitions. Gross profit, expressed as a percentage of net service revenues, increased to 26.5% for the nine months ended September 30, 2014, compared to 25.3% the same period in 2013. The increase was primarily due to lower than anticipated worker's compensation expense and recent acquisitions providing higher margins. General and administrative expenses, expressed as a percentage of net service revenues increased to 19.8% for the nine months ended September 30, 2014, from 18.4% for the nine months ended September 30, 2013. General and administrative expenses increased to $45,576,000 as compared to $36,026,000 for the nine months ended September 30, 2014 and 2013, respectively. The increase in general and administrative expenses was due to an increase in expenses related to our acquisitions, transaction costs for the acquisitions and increased expenditures related to information technology, Sarbanes-Oxley compliance efforts and legal and consulting fees for the nine months ended September 30, 2014 as compared to 2013. Depreciation and amortization, expressed as a percentage of net service revenues, increased to 1.2% from 0.8% for the nine months ended September 30, 2014 and 2013, respectively. Amortization of intangibles, which are principally amortized using accelerated methods, totaled $1,719,000 and $1,017,000 for the nine months ended September 30, 2014 and 2013, respectively. Interest Income Legislation enacted in Illinois entitles designated service program providers to receive a prompt payment interest penalty based on qualifying services approved for payment that remain unpaid after a designated period of time. As the amount and timing of the receipt of these payments are not certain, the interest income is recognized when received and reported in the income statement caption, "interest income." For the three and nine months ended September 30, 2014, we did not receive any prompt payment interest. For the three and nine months ended September 30, 2013, we received $183,000 in prompt payment interest. While we may be owed additional prompt payment interest, the amount and timing of receipt of such payments remains uncertain and we have determined that we will continue to recognize prompt payment interest income when received. Interest Expense, Net Primarily as a result of the capital lease agreements entered into on July 12 and September 11, 2014 as described in the Notes to Condensed Consolidated Financial Statements 6. Long-Term Debt, interest expense, net, increased to $180,000 from $(24,000) for the three months ended September 30, 2014 as compared to September 30, 2013 and to $484,000 from $326,000 for the nine months ended September 30, 2014 as compared to September 30, 2013. 20-------------------------------------------------------------------------------- Table of Contents Income Tax Expense Our effective tax rates from continuing operations for the three months ended September 30, 2014 and 2013 were 32.3% and 35.4%, respectively. The principal difference between the federal and state statutory rates and our effective tax rate is federal employment opportunity tax credits. Our effective tax rates from continuing operations for the nine months ended September 30, 2014 and 2013 were 32.6% and 31.0%, respectively. The principal difference between the federal and state statutory rates and our effective tax rate is federal employment opportunity tax credits. Discontinued Operations Effective March 1, 2013, we sold substantially all of the assets used in our Home Health Business as described in Item 1. Therefore, we have segregated the Home Health Business operating results and presented them separately as discontinued operations for all periods presented (see note 2- "Discontinued Operations" of the Notes to the Condensed Consolidated Financial Statements included elsewhere herein). The tables below depict the results of discontinued operations. |