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ADUS > SEC Filings for ADUS > Form 10-K on 28-Mar-2013All Recent SEC Filings

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Form 10-K for ADDUS HOMECARE CORP


28-Mar-2013

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion together with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements about our business and operations. Our actual results may differ materially from those we currently anticipate as a result of the factors we describe under "Risk Factors" and elsewhere in this Annual Report on Form 10-K.

Overview

We are a comprehensive provider of home and community based services, which are primarily social in nature and are provided in the home, focused on the dual eligible population. Our services include personal care and assistance with activities of daily living, and adult day care. Our consumers are individuals with special needs who are at risk of hospitalization or institutionalization, such as the elderly, chronically ill and disabled. Our payor clients include federal, state and local governmental agencies, commercial insurers and private individuals. We provide home and community based services through over 96 locations across 19 states to over 25,000 consumers.

Effective March 1, 2013, we sold substantially all of the assets used in our Home Health Business in Arkansas, Nevada and South Carolina, and 90% of the Home Health Business in California and Illinois, to the Purchasers for a cash purchase price of approximately $20 million. 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. Through these home health agencies, we previously provided physical, occupational and speech therapy, as well as skilled nursing services, to pediatric, adult infirm and elderly patients. We are also holding as assets for sale two agencies located in Idaho and Pennsylvania. 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 substantially positions us for future growth. The sale allows us to focus both management and financial resources to address changes in the home and community based services industry and to address the needs of managed care organizations as they become responsible for state sponsored programs. We have improved our financial performance by lowering our administrative costs and concentrating our efforts on the business that is growing and providing all of our profitability and disposing of the business that was unprofitable. 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 2012 and 2011 are provided in the table below:

                                                                                       Percent
                                                      2012             2011            Change
Net service revenues - continuing operations        $ 244,315        $ 230,105              6.2 %
Net service revenues - discontinued operations         38,822           42,995             (9.7 )%

Net income from continuing operations                   9,288            8,412             10.4 %
(Loss) from discontinued operations                    (1,653 )        (10,393 )            N/A

Net income (loss)                                   $   7,635        $  (1,981 )            N/A

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


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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 as well as 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 of hospitalization. These changes in condition are evaluated by appropriately trained managers and referred to appropriate medical personnel including the primary care physicians and managed care plans for treatment and follow-up. We will coordinate the services provided by our team with those of selected health care agencies. We believe this approach to the provision of 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 over time will increase our business with them.

Our ability to grow our net service revenues is closely correlated with the number of consumers to whom we provide our services. Our continued growth depends on our ability to maintain our existing payor client relationships, establish relationships with new payors, enter into new contracts and increase our referral sources. Our continued 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 individuals 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 primarily through organic growth, complemented with selective acquisitions. Our acquisitions have historically been focused on facilitating entry into new states.

On July 26, 2010, we entered into an Asset Purchase Agreement (the "Purchase Agreement"), pursuant to which we acquired the operations and certain assets of Advantage Health Systems, Inc., a South Carolina corporation ("Advantage"). Advantage is a provider of home and community based services in South Carolina and Georgia, which expanded our services across 19 states. The total consideration payable pursuant to the Purchase Agreement was $8.3 million, comprised of $5.1 million in cash, common stock consideration with a deemed value of $1.2 million resulting in the issuance of 248,000 common shares, a maximum of $2.0 million in future cash consideration subject to the achievement of certain performance targets set forth in an earn-out agreement and the assumption of certain specified liabilities. In April 2011, we paid the first earn-out payment of $0.5 million to the sellers of Advantage. During the fourth quarter of 2011 we completed a revaluation of the remaining contingent earn-out obligation and recorded a reduction of approximately $0.5 million with a remaining obligation of $0.7 million as of December 31, 2012.


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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. The following table presents our locations (including the locations disposed of in connection with the sale of our Home Health Business), acquisitions, start-ups and closures for the period January 1, 2010 to December 31, 2012:

                                                                      Total
    Total as previously reported December 31, 2010                       129
    Home health offices reported as discontinued operations in 2012      (22 )

    Total at December 31, 2010                                           107

    Closed/Merged                                                        (11 )

    Total at December 31, 2011                                            96

    Start-up                                                               1
    Closed/Merged                                                         (1 )

    Adjusted Total at December 31, 2012                                   96

As of December 31, 2012, we provided our home and community based services through 96 locations across 19 states.

Our payor clients are principally federal, state and local governmental agencies. The federal, state and local programs under which they 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 seeking to grow our private duty business.

For 2012, 2011 and 2010, our payor revenue mix for continuing operations was:

                                                    2012         2011         2010
    State, local and other governmental programs      94.9 %       93.5 %       92.7 %
    Commercial                                         1.0          1.3          1.2
    Private duty                                       4.1          5.2          6.1

                                                     100.0 %      100.0 %      100.0 %

We derive a significant amount of our net service revenues from our continuing operations in Illinois and California, which represented 64% and 7%; 58% and 8%; and 53% and 11% of our total net service revenues from continuing operations for the years ended December 31, 2012, 2011 and 2010, 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 57%, 51% and 45% of our total net service revenues from continuing operations for the years ended December 31, 2011, 2010 and 2009, respectively.

We also measure the performance of our business using a number of different metrics. We consider billable hours, billable hours per business day, revenues per billable hour and the number of consumers, or census.


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Components of our Statements of Operations

Net Service Revenues

We generate net service revenues from continuing operations by providing our services directly to individuals. We receive payment for providing such services from our payor clients, including federal, state and local governmental agencies, commercial insurers and private individuals.

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


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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. 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. The state amended its prompt payment interest terms, effective July 1, 2011, which changed the measurement period for outstanding invoices from a 60-day to a 90-day outstanding period. We believe this change in terms will reduce future amounts paid for prompt payment interest.

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 34% 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 and the results of operations for assets held for sale.


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Results of Operations

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

The following table sets forth, for the periods indicated, our consolidated
results of operations.



                                               2012                              2011                           Change
                                                      % of                              % of
                                                   Net Service                       Net Service
                                    Amount          Revenues          Amount          Revenues           Amount          %
                                                               (in thousands, except percentages)
Net service revenues               $ 244,315              100.0 %    $ 230,105              100.0 %     $ 14,210           6.2 %
Cost of service revenues             180,264               73.8        168,632               73.3         11,632           6.9

Gross profit                          64,051               26.2         61,473               26.7          2,578           4.2
General and administrative
expenses                              46,362               19.0         45,858               19.9            504           1.1
Revaluation of contingent
consideration                             -                  -            (469 )             (0.2 )          469        (100.0 )
Gain on sale of agency                  (495 )             (0.2 )           -                  -            (495 )           *
Depreciation and amortization          2,521                1.0          3,167                1.4           (646 )       (20.4 )

Total operating expenses              48,388               19.8         48,556               21.1           (168 )        (0.3 )
Operating income from continuing
operations                            15,663                6.4         12,917                5.6          2,746          21.3

Interest income                         (155 )             (0.1 )       (2,263 )             (1.0 )        2,108         (93.2 )
Interest expense                       1,723                0.7          2,524                1.1           (801 )       (31.7 )
Total interest expense, net            1,568                0.6            261                0.1          1,307         500.8

Income from continuing
operations before income taxes        14,095                5.8         12,656                5.5          1,439          11.4
Income tax expense                     4,807                2.0          4,244                1.8            563          13.3

Net income from continuing
operations                             9,288                3.8          8,412                3.7            876          10.4

Discontinued operations:
Earnings (loss) from home health
business, net of tax                  (1,653 )             (0.7 )      (10,393 )             (4.5 )        8,740         (84.1 )

Net income (loss)                  $   7,635                3.1 %    $  (1,981 )             (0.9 )%    $  9,616         485.4 %

Business Metrics
Average billable census               25,104                            23,877                             1,277           5.1 %
Billable hours (in thousands)         14,388                            13,504                               884           6.5
Average Billable hours per
census per month                          48                                47                                 1           2.1
Billable hours per business day       55,126                            51,938                             3,188           6.1
Revenues per billable hour         $   16.98                         $   17.04                          $  (0.06 )        (0.4 )%

* Percentage information not meaningful

Net service revenues from state, local and other governmental programs accounted for 94.9% and 93.5% of net service revenues for 2012 and 2011, respectively. Private duty and, to a lesser extent, commercial payors accounted for the remainder of net service revenues.

Net service revenues increased $14.2 million, or 6.2%, to $244.3 million for 2012 compared to $230.1 million for the same period in 2011. The increase was primarily due to a 5.1% increase in average census increase and a related 6.5% increase in billable hours.

Gross profit, expressed as a percentage of net service revenues, decreased to 26.2% for 2012, from 26.7% in 2011. This decrease as a percent of revenue of 0.5% is primarily due to an increase in workers' compensation costs as a result of an increase in average claim costs during 2012, partially offset by an increase in the average billed hours per census per month while leveraging the fixed wage cost for field staff.


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General and administrative expenses, expressed as a percentage of net service revenues decreased to 19.0% for 2012, from 19.9% in 2011. General and administrative expenses increased to $46.4 million in 2012 as compared to $45.9 million in 2011. In 2012, we had cost increases in administrative wages, telecom and technology related costs, an increase in management bonuses, an increase in corporate infrastructure and consulting expenses for business development initiatives which were partially offset by a decrease in bad debt expense due to improved collections and a decrease in legal related expenses.

Depreciation and amortization, expressed as a percentage of net service revenues, decreased to 1.0% for 2012, from 1.4% in 2011. Amortization of intangibles, which are principally amortized using accelerated methods, totaled $1.7 million and $2.2 million for 2012 and 2011, 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. We received $0.2 million in prompt payment interest in 2012 and $2.3 million in 2011. 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. The state amended its prompt payment interest terms, effective July 1, 2011, which changed the measurement period for outstanding invoices from a 60-day to a 90-day outstanding period. We believe this change in terms will reduce future amounts paid for prompt payment interest.

Interest Expense

Interest expense was $1.7 million and $2.5 million for 2012 and 2011, respectively. Interest expense decreased $0.8 million primarily due to a reduction in outstanding debt.

Income Tax Expense (Benefit)

Our effective tax rates from continuing operations for 2012 and 2011 were 34.1% and 33.5%, respectively. The principal difference between the Federal and State statutory rates and our effective tax rate is the use of Federal employment opportunity tax credits. Our effective tax rate for 2012 does not include any earned 2012 Federal employment opportunity tax credits, which will be recognized in 2013 as the Federal employment opportunity tax credits were reinstated in January 2013.

Discontinued Operations

During the fourth quarter of fiscal year 2012, we announced that we were pursuing strategic alternatives for our Home Health Business, and in February 2013, we entered into the Home Health Purchase Agreement. 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 Consolidated Financial Statements included elsewhere herein).


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See the table below that depicts the results of discontinued operations.

                                            2012                             2011                          Change
                                                 % of  Net                        % of  Net
                                                  Service                          Service
                                   Amount        Revenues          Amount         Revenues          Amount           %
                                                             (in thousands, except percentages)
Net service revenues              $ 38,822            100.0 %     $  42,995            100.0 %     $  (4,173 )        (9.7 )%
Cost of service revenues            20,818             53.6          22,673             52.7          (1,855 )        (8.2 )

Gross profit                        18,004             46.4          20,322             47.3          (2,318 )       (11.4 )
General and administrative
expenses                            20,743             53.4          21,068             49.0            (325 )        (1.5 )
Goodwill and intangible asset
impairment charge                       -                -           15,989             37.2         (15,989 )      (100.0 )
Depreciation and amortization           13               -              387              0.9            (374 )       (96.6 )

Operating income (loss) from
discontinued operations             (2,752 )           (7.1 )       (17,122 )          (39.8 )        14,370         (83.9 )

Income tax (benefit)                (1,099 )           (2.8 )        (6,729 )          (15.7 )         5,630          83.7

Net loss from discontinued
operations                        $ (1,653 )           (4.3 )%    $ (10,393 )          (24.2 )%    $   8,740         (84.1 )%

The losses were primarily due to reduced sales, higher costs to treat consumers and our inability to reduce fixed general and administrative costs at a rate consistent with revenue declines. We recorded an impairment charge of $16.0 million as part of discontinued operations in 2011 to reduce the carrying value of the related goodwill and intangible assets.


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Results of Operations

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

The following table sets forth, for the periods indicated, our consolidated
results of operations.



                                            2011                                 2010                             Change
. . .
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