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ADUS > SEC Filings for ADUS > Form 10-Q on 7-May-2014All Recent SEC Filings

Show all filings for ADDUS HOMECARE CORP

Form 10-Q for ADDUS HOMECARE CORP


7-May-2014

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 128 locations across 23 states to over 29,000 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 LHCG 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. On December 30, 2013 we sold one home health agency in Pennsylvania for $0.2 million. In November 2012, we ceased operations in 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 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 capital structure and liquidity 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 months ended March 31, 2014 and 2013 are provided in the tables below:

                                                      For the Three Months Ended
                                                               March 31,
                                                         2014               2013
   Net service revenues - continuing operations     $       71,683       $   62,998
   Net service revenues - discontinued operations               -             6,476
   Net income from continuing operations                     2,354            2,687
   Earnings from discontinued operations                        -            10,574
   Net income                                       $        2,354       $   13,261

   Total assets                                     $      162,542       $  151,350

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.

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 $12.3 million at the close and a maximum of $2.3 million in future cash based on certain performance. The related acquisitions costs were $0.7 million for the Medi Home Private Care Division of Medical Services of America, Inc. and Coordinated Home Health Care, LLC deal.

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. The final earn-out payment was made to Advantage for approximately $0.5 million on September 20, 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 March 31, 2014, we provided our home and community based services in 128 locations across 23 states. For the year ended 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. 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 anticipating a transition of business with government payors to managed care organizations and are seeking to grow our business with them as well as our private duty business.

For the three months ended March 31, 2014 and 2013 our payor revenue mix for continuing operations was:


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                                                        Three Months Ended
                                                             March 31,
                                                        2014           2013
       State, local and other governmental programs        95.4 %        95.0 %
       Commercial                                           3.9           1.1
       Private duty                                         0.7           3.9

                                                          100.0 %       100.0 %

We derive a significant amount of our net service revenues from our continuing operations in Illinois, which represented 61.5% and 65.5% of our total net service revenues from continuing operations for the three months ended March 31, 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 55.1% and 59.5% of our total net service revenues from continuing operations for the three months ended March 31, 2014 and 2013, 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.

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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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. 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 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 and 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.

Results of Operations

Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013

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


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                                                  For the Three Months Ended March 31,
                                                  2014                              2013                         Change
                                                          % Of                            % Of
                                                      Net  Service                     Net Service
                                        Amount          Revenues          Amount        Revenues          Amount           %
                                                                  (in thousands, except percentages)
Net service revenues                  $   71,683              100.0 %    $ 62,998             100.0 %    $   8,685          13.8 %
Cost of service revenues                  53,015               74.0        47,200              74.9          5,815          12.3

Gross profit                              18,668               26.0        15,798              25.1          2,870          18.2
General and administrative expenses       14,403               20.1        11,510              18.3          2,893          25.1
Depreciation and amortization                495                0.7           546               0.9            (51 )        (9.3 )

Total operating expenses                  14,898               20.8        12,056              19.1          2,842          23.6

Operating income from continuing
operations                                 3,770                5.3         3,742               5.9             28           0.7

Interest income                               (2 )               -             -                 -              (2 )
Interest expense                             156                0.2           208               0.3            (52 )

Total interest expense, net                  154                0.2           208               0.3            (54 )       (26.0 )

Income from continuing operations
before income taxes                        3,616                5.0         3,534               5.6             82           2.3
Income tax expense                         1,262                1.8           847               1.3            415          49.0

Net income from continuing
operations                                 2,354                3.3         2,687               4.3           (333 )       (12.4 )

Discontinued operations:
Earnings from home health business,
net of tax                                    -                  -         10,574              16.8        (10,574 )      (100.0 )

Net income                            $    2,354                3.3 %    $ 13,261              21.0 %    $ (10,907 )       (82.2 )%

Business Metrics
Average billable census                   29,497                           25,817                            3,680          14.3 %
Billable hours (in thousands)              4,236                            3,714                              522          14.1
Average Billable hours per census
per month                                     48                               48                               -             -
Billable hours per business day           67,243                           58,031                            9,212          15.9
Revenues per billable hour            $    16.92                         $  16.96                        $   (0.04 )        (0.2 )%

* Percentage information not meaningful

Net service revenues from state, local and other governmental programs accounted for 95.4% and 95.0% of net service revenues for the three months ended March 31, 2014 and 2013, respectively. Private duty and, to a lesser extent, commercial payors accounted for the remainder of net service revenues.

Net service revenues increased $8.7 million, or 13.8%, to $71.7 million for the three months ended March 31, 2014 compared to $63.0 million for the same period in 2013. The increase was primarily due to a 14.3% increase in average billable census, of which 8.0% is same store census growth and 6.3% is related to acquisitions.

Gross profit, expressed as a percentage of net service revenues, increased to 26.0% for the first quarter of 2014, compared to 25.1% the same period in 2013. The increase was primarily due to lower than anticipated worker's compensation and unemployment tax expense and recent acquisitions providing higher margins.

General and administrative expenses, expressed as a percentage of net service revenues increased to 20.1% for the three months ended March 31, 2014, from 18.3% for the three months ended March 31, 2013. General and administrative expenses increased to $14.4 million as compared to $11.5 million for the three months ended March 31, 2014 and 2013, respectively. The increase in general and administrative expenses was due to an increase in acquisition expenses, legal and consulting fees and personnel costs for the three months ended March 31, 2014 as compared to 2013.


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Depreciation and amortization, expressed as a percentage of net service revenues, decreased to 0.7% for the first quarter of 2014, from 0.9% for the same period in 2013. Amortization of intangibles, which are principally amortized using accelerated methods, totaled $0.3 for the three months ended March 31, 2014 and 2013.

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 no prompt payment interest for the three months ended March 31, 2014 or 2013. 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, Net

Interest expense remained the same at $0.2 million for the three months ended March 31, 2014 and 2013.

Income Tax Expense

Our effective tax rates from continuing operations for the three months ended March 31, 2014 and 2013 were 34.9% and 24.0%, 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.

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 Consolidated Financial Statements included elsewhere herein).

See table below that depicts the results of discontinued operations.

                                                              For the Three Months ended March 31,
                                                           2014                                 2013
                                                                 % of  Net                             % of  Net
                                                                  Service                               Service
                                                 Amount          Revenues             Amount           Revenues
                                                               (in thousands, except percentages)
Net service revenues                            $     -                  -  %       $    6,476              100.0 %
Cost of service revenues                              -                  -               3,713               57.3

Gross profit                                          -                  -               2,763               42.7
General and administrative expenses                   -                  -               3,674               56.7

Operating loss from discontinued operations           -                  -                (911 )            (14.1 )

Income tax benefit                                    -                  -                (374 )             (5.8 )

Net loss from discontinued operations           $     -                  -  %       $     (537 )             (8.3 )%

No revenues or expenses were recorded for the three month period related to the Home Health Business as the business has wound down. The losses for the three months ended March 31, 2013 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.


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Liquidity and Capital Resources

Overview

Our primary sources of liquidity are cash from operations and borrowings under our credit facility. At March 31, 2014 and December 31, 2013, we had cash balances of $17.0 million and $15.6 million, respectively.

As of March 31 2014 and December 31, 2013, we had no balances outstanding under the revolving credit portion of our credit facility. After giving effect to the amount drawn on our credit facility, approximately $12.4 million of outstanding letters of credit and borrowing limits based on an advanced multiple of adjusted EBITDA, we had $42.6 million available for borrowing under the credit facility as of March 31, 2014 and December 31, 2013.

We used $16.3 million of the proceeds from the sale of the Home Health Business to pay down the outstanding amount of the revolving credit facility during the first quarter of 2013. In addition, in consideration for our lender's consent to the sale of the Home Health Business, we agreed to work in good faith to . . .

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