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ADUS > SEC Filings for ADUS > Form 10-Q on 8-Nov-2013All Recent SEC Filings

Show all filings for ADDUS HOMECARE CORP

Form 10-Q for ADDUS HOMECARE CORP


8-Nov-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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, primarily social in nature, provided in the home, and 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 94 locations across 21 states to over 26,000 consumers.

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. (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 an asset for sale an agency located in Pennsylvania and have entered into an asset purchase agreement providing for the sale of such agency. We also closed an agency in Idaho in January 2013. 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 positions us for future growth by allowing 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 and are 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 the three and nine months ended September 30, 2013 and 2012 are provided in the tables below:

                                             For the Three Months Ended,
                                                    September 30,
                                             2013                  2012              Percent Change
Net service revenues - continuing
operations                               $      67,306         $      61,211                    10.0 %
Net service revenues - discontinued
operations                                          -                  9,795                     N/A
Net income from continuing
operations                                       2,770                 2,204                    25.7 %
Loss from discontinued operations                 (203 )                (407 )                 (50.1 )%

Net income                               $       2,567         $       1,797                    42.8 %


                                              For the Nine Months Ended
                                                    September 30,
                                             2013                  2012              Percent Change
Net service revenues - continuing
operations                               $     196,059         $     180,540                     8.6 %
Net service revenues - discontinued
operations                                       6,475                28,671                   (77.4 )%
Net income from continuing
operations                                       8,039                 5,785                    39.0 %
Loss from discontinued operations                 (890 )              (1,895 )                 (53.0 )%
Gain on sale of Home Health Business            11,111                    -                      N/A

Net income                               $      18,260         $       3,890                     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 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.


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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 $0.5 million as of September 30, 2013. The sellers of Advantage disagreed with our calculation of the second earn-out payment. The dispute was submitted to an arbitrator. Based upon the arbitrator's ruling, the final payment of $534 was made in October 2013.

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, 2013, we provided our home and community based services in 94 locations across 21 states. For the year ended December 31, 2012, we provided our home and community based services in 91 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 the three and nine months ended September 30, 2013 and 2012 our payor revenue mix for continuing operations was:

                                          For the Three Months Ended                For the Nine Months  Ended
                                                September 30,                             September 30,
                                          2013                  2012                2013                  2012
State, local and other
governmental programs                         94.0 %                95.0 %              94.0 %                95.0 %
Commercial                                     2.0                   1.0                 2.0                   1.0
Private duty                                   4.0                   4.0                 4.0                   4.0

                                             100.0 %               100.0 %             100.0 %               100.0 %


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We derive a significant amount of our net service revenues from our continuing operations in Illinois, which represented 66.0% and 64.2% of our total net service revenues from continuing operations for the three months ended September 30, 2013 and 2012, respectively. Net service revenues from our operations in Illinois represented 65.8% and 63.4% of our total net service revenues for the nine months ended September 30, 2013 and 2012, 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 58.9% and 57.6% of our total net service revenues from continuing operations for the three months ended September 30, 2013 and 2012, respectively. The Illinois Department on Aging accounted for 59.1% and 56.8% of our total net service revenues from continuing operations for the nine months ended September 30, 2013 and 2012, 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.

On April 2, 2013, the Centers for Medicare and Medicaid Services published final regulations for implementation of the increased Federal Medical Assistance Percentage ("FMAP") payments for the Medicaid program under the Patient Protection and Affordable Care Act of 2010 and the Health Care and Education Reconciliation Act of 2010 (collectively, both laws are referred to herein as the "Health Reform Act"). Under the Health Reform Act, the FMAP to states that elect to provide Medicaid coverage to "newly eligible" individuals with incomes up to 133% of the federal poverty level is 100% for calendar years 2014-2016 and gradually decreases to 90% in 2020 and thereafter. States will receive the enhanced FMAP payment for newly eligible individuals who previously did not qualify for Medicaid. For states that already covered individuals who otherwise became eligible for Medicaid under the Health Reform Act, the regular FMAP will increase by a much lower 2.2%. The final rule, among other things, establishes methodologies for states to determine who is newly eligible. Not all states in which we do business may elect to provide coverage to newly eligible individuals. We are not able at this time to determine the impact these changes will have on our business.

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.


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Based on the value of our publicly held shares as of June 30, 2013, we will become subject to the reporting requirements for accelerated filers beginning with our Annual Report on Form 10-K for the year ending December 31, 2013. In connection with our transition from a smaller reporting company to an accelerated filer we expect to incur greater administrative costs in the remainder of the fiscal year.

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.


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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. 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 35.0% in 2013 and 34.1% in 2012 are principally due to state taxes and the use of federal employment tax credits.

Loss from Home Health Business, Net of Tax

Loss from Home Health Business, net of tax consists of the results of operations, net of tax recorded for the Home Health Business which was classified as discontinued in December 2012 and subsequently sold as of March 1, 2013.

Gain on Sale of the Home Health Business, Net of Tax

Gain on sale of the Home Health Business, net of tax consists of the results of the gain, net of tax we recorded for selling our Home Health Business effective March 1, 2013.

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 of assets held for sale.


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Results of Operations

Three Months Ended September 30, 2013 Compared to Three Months Ended
September 30, 2012

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



                                                  For the Three Months Ended September 30,
                                                   2013                                2012                         Change
                                                            % of                              % of
                                                         Net Service                       Net Service
                                       Amount             Revenues           Amount         Revenues         Amount          %
                                                                  (in thousands, except percentages)
Net service revenues                 $   67,306                  100.0 %    $ 61,211              100.0 %    $ 6,095          10.0 %
Cost of service revenues                 50,080                   74.4        45,528               74.4        4,552          10.0

Gross profit                             17,226                   25.6        15,683               25.6        1,543           9.8
General and administrative
expenses                                 12,424                   18.5        11,181               18.3        1,243          11.1
Depreciation and amortization               539                    0.8           635                1.0          (96 )       (15.1 )

Total operating expenses                 12,963                   19.3        11,816               19.3        1,147           9.7

Operating income from continuing
operations                                4,263                    6.3         3,867                6.3          396          10.2
Interest expense (income), net              (24 )                 (0.1 )         407                0.7         (431 )      (105.9 )

Income from continuing operations
before income taxes                       4,287                    6.4         3,460                5.6          827          23.9

Income tax expense                        1,517                    2.3         1,256                2.0          261          20.8

Net income from continuing
operations                                2,770                    4.1         2,204                3.6          566          25.7

Discontinued operations:
Loss from home health business,
net of tax                                 (203 )                 (0.3 )        (407 )             (0.7 )        204         (50.1 )

Net income                           $    2,567                    3.8 %    $  1,797                2.9 %    $   770          42.8 %

Business Metrics
Average billable census                  27,058                               24,138                           2,920          12.1 %
Billable hours (in thousands)             3,941                                3,521                             420          11.9
Average Billable hours per census
per month                                    49                                   49                              -             -
Billable hours per business day          59,735                               54,169                           5,566          10.3
Revenues per billable hour           $    17.08                             $  16.93                         $  0.15           0.9 %

Net service revenues from state, local and other governmental programs accounted for 94.0% and 95.0% of net service revenues for the three months ended September 30, 2013 and 2012, respectively. Private duty and, to a lesser extent, commercial payors accounted for the remainder of net service revenues.

Net service revenues increased $6.1 million, or 10.0%, to $67.3 million for the three months ended September 30, 2013 compared to $61.2 million for the same period in 2012. The increase was primarily due to 12.1% increase in average billable hours and a related 11.9% increase in average billable census.

Gross profit, expressed as a percentage of net service revenues, remained at 25.6% for the third quarter of 2013, compared to the same period in 2012.


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General and administrative expenses, expressed as a percentage of net service revenues increased to 18.5% for the three months ended September 30, 2013, from 18.3% for the three months ended September 30, 2012. General and administrative expenses increased to $12.4 million as compared to $11.2 million for the three months ended September 30, 2013 and 2012, respectively. The increase in general and administrative expenses was due to an increase in legal, accounting and severance expense partially offset by a reduction in our workers' compensation expense for the three months ended September 30, 2013 as compared to 2012.

Depreciation and amortization, expressed as a percentage of net service revenues, decreased to 0.8% for the third quarter of 2013, from 1.0% for the same period in 2012. Amortization of intangibles, which are principally amortized using accelerated methods, totaled $0.3 and $0.4 million for the three months ended September 30, 2013 and 2012, 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. 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. We received prompt payment interest in the amounts of $0.2 million for the nine months ended September 30, 2013 and $0.0 million for the three months ended September 30, 2012.

Interest Expense

Interest expense (income) was $(0.02) million and $0.4 million for the three months ended September 30, 2013 and 2012, respectively. Interest expense decreased $0.4 million primarily due to a prompt payment interest income payment of $0.2 million received in the third quarter of 2013.

Income Tax Expense

Our effective tax rates from continuing operations for the three months ended September 30, 2013 and 2012 were 35.4% and 36.3%, respectively. The principal difference between the Federal and State statutory rates and our effective tax rate is Federal employment opportunity tax credits. The Federal employment opportunity tax credits were reinstated in 2013. Given the uncertainty of the deduction in 2012, they were not included in the 2012 income tax provision.


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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. Following the sale, we . . .

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