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 provider of home-based social and medical services focused on the
elderly who are enrolled in both Medicare and Medicaid, also known as dual
eligibles. Our services include personal care and assistance with activities of
daily living, skilled nursing and rehabilitative therapies, and adult day care.
The individuals who receive our services may be 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 our services through 117 locations
across 19 states to over 26,000 individuals.
We operate our business through two segments, home & community services and home
health services. Our home & community services are social, or non-medical, in
nature and include assistance with bathing, grooming, dressing, personal hygiene
and medication reminders, and other activities of daily living. We provide
home & community services on a long-term, continuous basis, with an average
duration of approximately 20 months per individual. Our home health services are
primarily medical in nature and include physical, occupational and speech
therapy, as well as skilled nursing. We generally provide home health services
on a short-term, intermittent or episodic basis to individuals recovering from
an acute medical condition, with an average length of care of approximately 80
days.
We utilize a coordinated care model that is designed to enhance individual
outcomes and satisfaction as well as reduce service duplication and lower the
cost of and/or prevent acute care treatment. Through our coordinated care model,
we utilize our social services to observe and report changes in the condition of
individuals for the purpose of early intervention in the disease process,
thereby preventing or reducing the cost of medical services, and/or
institutionalization.
We also utilize an integrated service delivery model, in markets where we
operate both home & community services and home health services, which maximizes
the long-term relationship we have with individuals in our home & community
segment through on-going monitoring and possible provision of our home health
services to this same population as their needs warrant. Our care and service
coordinators work with our caregivers, consumers and their medical providers to
review our consumers' current and anticipated service needs and, based on this
continuous review, identify coordination and/or integration opportunities
including the possible provision of home & community services to our home health
individuals and the referral sources in that segment. This provides us with an
additional source of revenue, enables individuals to access both social and
medical services from one homecare provider and appeals to referral sources who
are seeking a single provider with a breadth of services.
Our ability to grow our net service revenues is directly related to the number
of individuals 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 individuals 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.
Finally, we believe the provision of home & community services is more effective
and cost-efficient than the provision of similar services in an institutional
setting for long-term care. We also believe payors and governmental agencies are
increasingly recognizing the benefits of providing care in a sub-acute setting
in the home where we also believe the overwhelming majority of individuals
prefer to receive care especially as an alternative to an institutional
long-term care setting.
With the passage of the Health Reform Act, discussed below, the states and the
federal government are proposing to combine the administrative activities for
benefits provided to dual eligibles. Several states in which we are doing
business are currently in the process of requesting proposals from various
managed care insurance providers for the administration of these programs. We
are in active discussions with several of these managed care providers to be a
core provider of services to more effectively manage this population.
17
--------------------------------------------------------------------------------
Table of Contents
In March 2010, the President signed into law the Patient Protection and
Affordable Care Act and the Healthcare and Education Reconciliation Act of 2010
(collectively, both laws are referred to herein as the "Health Reform Act"). The
Health Reform Act includes several provisions that may affect reimbursement for
home health agencies. The Health Reform Act is broad, sweeping reform, and is
subject to change, including through the adoption of related regulations, the
way in which its provisions are interpreted and the manner in which it is
enforced. We cannot assure you that the provisions of the Health Reform Act will
not adversely impact our business, results of operations or financial position.
We may be unable to mitigate any adverse effects resulting from the Health
Reform Act.
On July 14, 2010, the Office for Civil Rights of the U.S. Department of Health
and Human Services ("OCR") published proposed regulations to implement the
Health Information Technology for Economic and Clinical Health Act (the "HITECH
Act"). The HITECH Act imposed additional privacy and security requirements on
health care providers and on their business associates. Failure to comply with
the Health Insurance Portability and Accountability Act, or HIPAA, could result
in fines and penalties that could have a material adverse effect on the Company.
Recently, the OCR has imposed substantial financial and other penalties on
covered entities that improperly disclosed individuals' health information.
In November 2010, CMS released its Home Health Prospective Payment System Update
for Calendar Year 2011. It included a 1.1% market basket increase for 2011
(after application of the mandated 1% reduction) and a mandated 3.79% rate
reduction. The rate reduction resulted from the CMS determination that there had
been a general increase in case mix that CMS believed was unwarranted. CMS
believed that this "case-mix creep" was due to improved coding, coding practice
changes, and other behavioral responses to the change in reimbursement that went
in to effect in 2009, including greater use of high therapy treatment plans
above what CMS believed was related to an increase in patient acuity. CMS warned
that it would continue to monitor changes in case-mix. If new data identifies
additional increases in case-mix, CMS would immediately impose further
reductions. The final 2011 payment base rate reflected a 0.3% decrease from the
proposed market basket rate in July 2010. CMS announced that it was postponing
its proposed 3.79% reduction in home health rates for calendar year 2012 pending
its further monitoring of case-mix changes. Home health agencies that did not
submit required quality data would be subject to a 2% reduction in the market
basket update.
On August 2, 2011 the President signed into law the Budget Control Act of 2011,
which raised the debt ceiling and put into effect a series of actions for
deficit reduction. The Budget Control Act created a Congressional Joint Select
Committee on Deficit Reduction that was tasked with proposing additional deficit
reduction of at least $1.5 trillion. The committee was unsuccessful which
triggered automatic across the board reductions in spending of $1.2 trillion.
Medicare is subject to these reductions but Medicare reductions are capped at
2%.
As mandated by the Health Reform Act, on October 20, 2011, CMS released final
regulations for the Medicare Shared Savings Program. Although the Health Reform
Act mandates that the program be established no later than January 1, 2012, CMS
set start dates of April 1, 2011 and July 1, 2011. The Medicare Shared Savings
Program is designed to give financial incentives to healthcare providers and
suppliers that meet criteria established by the U.S. Department of Health and
Human Services ("DHHS") that work together to manage and coordinate care through
Accountable Care Organizations ("ACOs") for fee-for-service Medicare
beneficiaries assigned to the ACO by CMS to increase quality of care and reduce
costs. On December 19, 2011, CMS announced 32 pilot "pioneer ACOs". In proposed
regulations published April 7, 2011, CMS requested comments on a number of
issues including the range of providers and suppliers that could participate in
an ACO. Reaction to the proposed regulations issued on April 7, 2011 was
generally negative especially with regard to start up costs, retroactive
assignment of beneficiaries, antitrust issues, the proposed quality measures
(both the number and complexity), and the lack of a model that only includes
shared savings. The final regulations addressed several but not all of these
concerns. The final regulations set a "savings-only model" where providers share
any savings over a threshold amount but do not share any losses, as well as a
two sided model where the ACO shares in the savings but is also at risk for
losses. The number of quality measures is reduced by almost one half, and
beneficiaries are assigned prospectively. The first performance period began on
January 1, 2012. On April 10, 2012, CMS announced the selection of the first 27
ACOs to participate in the Medicare Shared Savings Program. On July 9, 2012, CMS
announced 88 additional ACOs bringing the total to 147 ACOs.
In connection with the ACO rules, also on October 20, 2011, the Federal Trade
Commission ("FTC") and the Department of Justice ("DOJ") released a joint
antitrust policy statement, the Internal Revenue Service released a fact sheet,
and the Office of Inspector General ("OIG") released an interim final rule with
five fraud waivers (waiving prosecution under the federal anti-kickback statute
applicable to federal and state healthcare programs, the federal Ethics in
Patient Referral Act or physician referral law and the Civil Monetary Penalty
Law and laws regarding gain sharing arrangements). The FTC and the DOJ antitrust
policy statement addressed some but not all antitrust concerns. The OIG waivers
set forth who would be protected by the waivers and under what circumstances. A
home health agency cannot qualify for a waiver for activities during ACO
pre-participation, which would include activities in the start-up period until
an application is accepted but which CMS states could also occur during the
participation period. Post-acute care facilities, such as skilled nursing
facilities ("SNFs") and inpatient rehabilitation facilities ("IRFs"), can
qualify for pre-participation waivers. Without a pre-participation waiver, it
may be difficult for home health agencies, such as ours, to participate in the
planning process for formation of an ACO and this may put us at a disadvantage
in negotiating sharing of savings if we were to participate in an ACO. In
addition, because other post-acute care providers, such as SNFs and IRFs, can
participate in the planning process they may more readily participate in ACOs
and may attract referrals that otherwise would have been made to us. Although
provider and supplier participation in an ACO is voluntary, participation by our
competitors in some markets may force us to participate as well, or if we do not
participate, result in loss of business. Also, where we do not participate we
will need to be mindful of quality measure criteria and if we are unable to meet
those criteria we could be at risk for losing Medicare referrals. In addition,
other savings programs similar to ACOs may be adopted by government and
commercial payors to control costs and reduce hospital readmissions in which we
could be financially at risk. We cannot predict what effect, if any, ACOs will
have on our company.
18
--------------------------------------------------------------------------------
Table of Contents
On July 15, 2011, DHHS published two sets of proposed regulations relating to
health insurance exchanges established under the Health Reform Act providing
guidance and options to states on how to structure their exchanges. On
September 30, 2011, DHHS extended the date for public comment from September 28
to October 31, 2011. CMS published final regulations on March 27, 2012. On
December 16, 2011, CMS issued an "Essential Benefits Bulletin," which provided a
broad outline of benefit categories, including habilitative and rehabilitative
services, but left the definition of essential benefits to the states, to be
defined in a benchmark plan selected by each state. The benchmark plan is
supposed to reflect the scope of services and limits in a plan offered by a
typical employer in the state. At this point it is uncertain what services will
be mandated for coverage by exchanges or at what level services will be paid or
what impact the exchanges will have on other payors.
In the Final Home Health Prospective Payment System Update for Calendar Year
2012 CMS imposed a 5.1% reduction to the national standardized 60-day episode
rates that is being phased in over 2 years. The reduction in calendar year 2012
is 3.8% and the remaining 1.3% will be applied for calendar year 2013. After
offset of the reduction for calendar year 2012, the market basket update is
1.4%, which results in a 2012 rate that is less than the 2011 rate. Home health
agencies that do not meet quality data reporting requirements have a market
basket update of 0.6%. CMS also implemented several other changes. It removed
two codes for hypertension from the home health PPS case-mix model's
hypertension group. In addition, CMS revised payment weights, lowering the
relative weights, and thus payments, for home health episodes with a high number
of therapy visits and increasing the weights, and payments, for episodes with
little or no therapy.
CMS also reported that it plans to do further analysis of the costs for
providing therapy visits and the use of therapy assistants for future rulemaking
and plans to make further rate adjustments in accordance with its findings. In
its March 2012 Report to Congress, the Medicare Payment Advisory Commission, or
MedPAC, an independent congressional agency that advises Congress on issues
involving the Medicare program, reiterated its belief that home health agency
margins are too high and its recommendation that payments for 2013 should be
rebased.
On July 13, 2012, CMS published the proposed Medicare 2013 Home Health update.
CMS proposes a 1.5% payment update reduced by 1.32% to offset what it views as
case mix "creep". CMS also proposes additional methods to enforce compliance
with home health conditions of participation and the imposition of alternative
sanctions for home health agencies with deficiencies, including civil monetary
penalties.
Reductions in Medicare home health agency payments, whether through rebasing or
otherwise, would decrease our revenue, which would have a negative effect on our
profits and liquidity.
Segments
We operate our business through two segments, home & community services and home
health services. We have organized our internal management reports to align with
these segment designations. As such, we have identified two reportable segments,
home & community and home health, applying the criteria in ASC 280, "Disclosure
about Segments of an Enterprise and Related Information". The following table
presents our locations by segment, setting forth acquisitions, start-ups and
closures for the period January 1, 2012 to June 30, 2012:
Home & Home
Community Health Total
Total at December 31, 2011 89 29 118
Merged/Sold (1 ) (1 ) (2 )
Start-up 1 - 1
Total at June 30, 2012 89 28 117
As of June 30, 2012, we provided our services through 117 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 in both of our
segments.
19
--------------------------------------------------------------------------------
Table of Contents
For the three and six months ended June 30, 2012 and 2011, our payor revenue mix
by segment was as follows:
Home & Community
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
2012 2011 2012 2011
State, local and other governmental programs 95.3 % 94.5 % 95.4 % 94.5 %
Commercial 1.0 0.9 0.9 0.8
Private duty 3.7 4.6 3.7 4.7
100.0 % 100.0 % 100.0 % 100.0 %
Home Health
For the Three For the Six
Months Ended Months Ended
June 30, June 30,
2012 2011 2012 2011
Medicare 66.4 % 66.3 % 64.4 % 65.9 %
State, local and other governmental programs 17.8 18.2 19.0 18.4
Commercial 11.4 9.9 11.9 10.0
Private duty 4.4 5.6 4.7 5.7
100.0 % 100.0 % 100.0 % 100.0 %
20
--------------------------------------------------------------------------------
Table of Contents
We also measure the performance of each segment using a number of different
metrics. For our home & community segment, we consider billable hours, billable
hours per business day, revenues per billable hour and the number of consumers,
or census. For our home health segment, we consider Medicare admissions,
non-Medicare admissions, and Medicare revenues per episode completed.
We derive a significant amount of our net service revenues from our operations
in Illinois and California, which represented 61.8% and 9.6%; and 55.3% and
10.5%, of our total net service revenues for the three months ended June 30,
2012 and 2011, respectively. Net service revenues from our operations in
Illinois and California represented 61.0% and 9.6%; and 54.9% and 10.6%, of our
total net service revenues for the six months ended June 30, 2012 and 2011,
respectively.
A significant amount of our net service revenues are derived from two specific
payor clients. The Illinois Department on Aging, in the home & community
segment, and Medicare, in the home health segment, which accounted for 48.8% and
11.0%; and 42.2% and 12.9% of our total net service revenues for the three
months ended June 30, 2012 and 2011, respectively. The Illinois Department on
Aging and Medicare accounted for 48.3% and 10.5%; and 41.8% and 12.7% of our
total net service revenues for the six months ended June 30, 2012 and 2011,
respectively.
Components of our Statements of Income
Net Service Revenues
We generate net service revenues by providing our home & community services and
home health 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.
Home & community segment revenues are typically generated on an hourly basis.
Our home & community segment revenues 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 for our home & community segment
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.
Home health segment revenues are primarily generated on a per episode or visit
basis rather than on a flat fee or an hourly basis. Our home health segment
revenues are generated principally through reimbursements by the Medicare
program, and to a lesser extent from Medicaid programs, commercial insurers and
private duty. Net service revenues from home health payors, other than Medicare,
are readily determinable and recognized as net service revenues at the time the
services are rendered. Medicare reimbursements are based on 60-day episodes of
care. The anticipated net service revenues from an episode are initially
recognized as accounts receivable and deferred revenues and subsequently
amortized as net service revenues ratably over the 60-day episodic period. At
the end of each episode of care, a final billing is submitted to Medicare and
any changes between the initial anticipated net service revenues and final
billings are recorded as an adjustment to net service revenues. For open
episodes, we estimate net service revenues based on historical data and adjust
for the difference between the initial anticipated net service revenues and the
ultimate final claim amount.
Cost of Service Revenues
We incur direct care wages, payroll taxes and benefit-related costs in
connection with our employees providing our home & community and home health
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.
For home health services, we provide medical supplies and occasionally hire
contract labor services to supplement existing staffing in order to meet our
consumers' needs.
General and Administrative Expenses
Our general and administrative expenses consist of expenses incurred in
connection with our segments' activities and as part of our central
administrative functions.
Our general and administrative expenses for home & community and home health
services consist principally of supervisory personnel, care coordination and
office administration costs. Our general and administrative expenses for home
health also include additional staffing for clinical and admissions processing.
These expenses consist principally of wages, payroll taxes and benefit-related
costs; facility rent; operating costs such as utilities, postage, telephone and
office expenses; and bad debt expense. The Company has 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 for each division.
Our corporate general and administrative expenses cover the centralized
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 at the segment level consist principally of furniture and
equipment, and for the home & community segment, also include vehicles for our
adult day centers.
A substantial portion of our capital expenditures is infrastructure-related or
for our corporate office. Corporate asset purchases consist primarily of network
administration and telephone equipment, operating system software, furniture and
equipment. 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.
21
--------------------------------------------------------------------------------
Table of Contents
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 consists of interest costs on our credit facility and other
debt instruments.
Income Tax Expense
All of our income 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.
Results of Operations
Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011
The following table sets forth, for the periods indicated, our unaudited
consolidated results of operations.
Three Months Ended Three Months Ended
June 30, 2012 June 30, 2011 Change
% of % of
Net Service Net Service
Amount Revenues Amount Revenues Amount %
(in thousands, except percentages)
Net service revenues:
Home & Community $ 58,656 83.5 % $ 55,009 80.6 % $ 3,647 6.6 %
Home Health 11,625 16.5 13,243 19.4 (1,618 ) (12.2 )
Total 70,281 100.0 68,252 100.0 2,029 3.0
Operating income before corporate
expenses:
Home & Community 7,078 12.1 6,020 10.9 1,058 17.6
Home Health (47 ) (0.4 ) 840 6.3 (887 ) (105.6 )
Total segment operating income 7,031 10.0 6,860 10.1 171 2.5
Corporate general and
administrative expenses 4,257 6.1 3,981 5.8 276 6.9
Corporate depreciation and
amortization 170 0.2 189 0.3 (19 ) (10.1 )
Total operating income 2,604 3.7 2,690 4.0 (86 ) (3.2 )
Interest expense 426 0.6 668 1.0 (242 ) (36.2 )
Income from operations before
taxes 2,178 3.1 2,022 3.0 156 7.7
Income tax expense 714 1.0 689 1.0 25 3.6
Net income $ 1,464 2.1 % $ 1,333 2.0 % $ 131 9.8 %
Our net service revenues increased by $2.0 million, or 3.0%, to $70.3 million
for the three months ended June 30, 2012 compared to $68.3 million for the same
period in 2011. This net increase represents 6.6% growth in home & community net
service revenues partially offset by a 12.2% decline in home health net service
revenues. Home & community revenue growth was driven by an increase in average
census and related increase in billable hours partially offset by a decrease in
the rate per billable hour. Our home health revenue decline in the second
quarter of 2012 was primarily due to a decrease in Medicare and non-Medicare
admissions from on-going operations and a loss of revenues from agencies that
were closed or sold.
Total operating income, expressed as a percentage of net service revenues, for
the three months ended June 30, 2012 and 2011, was 3.7% and 4.0%, respectively.
Corporate general and administrative expenses increased by $0.3 million to 6.1%
of net service revenues for the three months ended June 30, 2012.
The decrease of $0.1 million in operating income for the three months
ended June 30, 2012 consists of an operating income increase of $1.1 million in
our home & community segment due primarily to an increase in billable hours and
improved gross profit percentage offset by a $0.9 million decrease in operating
income in our home health segment primarily due to a decrease in admissions and
a decline in gross margin percentage. In addition, our corporate costs increased
by $0.3 million in 2012 primarily due to an increase in corporate wage related
costs as a result of an increase in our corporate infrastructure and an increase
in other corporate administrative expenses.
Total segment operating income, expressed as a percentage of net service
revenues, for the three months ended June 30, 2012 and 2011, was 10.0% and 10.1%
respectively. Corporate general and administrative expenses increased to 6.1% of
net service revenues for the three months ended June 30, 2012, from 5.8% for the
same period in 2011.
22
--------------------------------------------------------------------------------
Table of Contents
Home & Community Segment
The following table sets forth, for the periods indicated, a summary of our
home & community segment's unaudited results of operations through operating
income, before corporate expenses:
Three Months Ended Three Months Ended
June 30, 2012 June 30, 2011 Change
% of Net % of Net
Service Service
Amount Revenues Amount Revenues Amount %
(in thousands, except percentages)
Net service revenues $ 58,656 100.0 % $ 55,009 100.0 % $ 3,647 6.6 %
Cost of service revenues 43,532 74.2 41,076 74.7 2,456 6.0
Gross profit 15,124 25.8 13,933 25.3 1,191 8.5
General and administrative expenses 7,585 12.9 7,304 13.3 281 3.8
Depreciation and amortization 461 0.8 609 1.1 (148 ) (24.3 )
Operating income $ 7,078 12.1 % $ 6,020 10.9 % $ 1,058 17.6 %
Segment Data:
Billable hours (in thousands) 3,477 3,229 248 7.7 %
Billable hours per business day 54,334 50,456 3,878 7.7 %
Revenues per billable hour $ 16.86 $ 17.03 $ (0.17 ) (1.0 )%
Average census 23,714 22,753 961 4.2 %
Net service revenues from state, local and other governmental programs accounted
for 95.3% and 94.5% of home & community net service revenues for the three
months ended June 30, 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 $3.7 million, or 6.6%, to $58.7 million for the
second quarter of 2012 compared to $55.0 million for the same period in 2011.
The increase was primarily due to a 4.2% increase in average census and a
related 7.7% increase in billable hours partially offset by a slight decrease in
the average revenues per billable hour by 1.0%.
Gross profit, expressed as a percentage of net service revenues, increased to
25.8% for the second quarter of 2012, from 25.3% for the same period in 2011.
This increase of 0.5% is primarily due to a continued focus on field staff
productivity and management of service costs.
General and administrative expenses, expressed as a percentage of net service
revenues decreased to 12.9% for the three months ended June 30, 2012, from 13.3%
for the three months ended June 30, 2011. General and administrative expenses
increased by $0.3 million to $7.6 million as compared to $7.3 million for the
three months ended June 30, 2012 and 2011, respectively. This increase of $0.3
million is primarily due to an increase in administrative wages and telecom
related costs partially offset by reductions in bad debt expense due to our
continued focus on collections.
Depreciation and amortization, expressed as a percentage of net service
revenues, decreased to 0.8% for the second quarter of 2012, from 1.1% for the
same period in 2011. Amortization of intangibles, which are principally
amortized using accelerated methods, totaled $0.4 million and $0.6 million for
the three months ended June 30, 2012 and 2011, respectively.
23--------------------------------------------------------------------------------
Table of Contents
Home Health Segment
The following table sets forth, for the periods indicated, a summary of our home
health segment's unaudited results of operations through operating income,
before corporate expenses:
Three Months Ended Three Months Ended
June 30, 2012 June 30, 2011 Change
% of Net % of Net
Service Service
Amount Revenues Amount Revenues Amount %
(in thousands, except percentages)
Net service revenues $ 11,625 100.0 % $ 13,243 100.0 % $ (1,618 ) (12.2 )%
Cost of service revenues 6,330 54.5 7,066 53.4 (736 ) (10.4 )
Gross profit 5,295 45.5 6,177 46.6 (882 ) (14.3 )
General and administrative expenses 5,338 45.9 5,208 39.3 130 2.5
Depreciation and amortization 4 0.0 129 1.0 (125 ) (96.9 )
Operating (loss) income $ (47 ) (0.4 )% $ 840 6.3 % $ (887 ) (105.6 )%
Segment Data:
Medicare admissions 2,012 2,274 (262 ) (11.5 )%
Non-Medicare admissions 1,236 1,707 (471 ) (27.6 )%
Medicare revenues per episode completed $ 2,551 $ 2,517 $ 34 1.4 %
Net service revenues from Medicare accounted for 66.4% and 66.3% of home health
net service revenues for the three months ended June 30, 2012 and 2011,
respectively. Non-Medicare net service revenues, in order of significance,
include Medicaid and other governmental programs, commercial insurers and
private duty payors.
Net service revenues decreased $1.6 million, or 12.2%, to $11.6 million for the
second quarter of 2012, compared to $13.2 million in the same period of 2011.
Our home health revenue decline in the second quarter of 2012 was primarily due
to an 18.4% decrease in admissions and a loss of revenues from agencies that
were closed or sold.
Gross profit, expressed as a percentage of net service revenues, decreased to
45.5% for the three months ended June 30, 2012, from 46.6% in the same period of
2011. This decrease of 1.1% in gross margin percentage is primarily due to the
reduction in 2012 Medicare payment base rates and a decrease in field staff
productivity.
General and administrative expenses, expressed as a percentage of net service
revenues, increased to 45.9% for the second quarter of 2012, from 39.3% for the
same period in 2011. General and administrative expenses increased by $0.1
million to $5.3 million as compared to $5.2 million for the three months ended
June 30, 2012 and 2011, respectively. This increase of $0.1 million was due to
an increase in management and administrative staffing costs and an increase in
bad debt expense partially offset by a reduction in consulting expenses.
Total operating (loss) income expressed as a percentage of net service revenues,
for the three months ended June 30, 2012 and 2011, was (0.4)% and 6.3%,
respectively.
Depreciation and amortization, expressed as a percentage of net service
revenues, decreased by 96.9% for the three months ended June 30, 2012. This
decrease is due to the write-off of all intangible assets in the third quarter
of 2011 as a result of an impairment analysis completed.
24
--------------------------------------------------------------------------------
Table of Contents
Corporate General and Administrative Expense
Corporate general and administrative expenses increased $0.3 million, or 6.9%,
to $4.3 million for the three months ended June 30, 2012, from $4.0 million for
the same period in 2011. This increase was primarily due to an increase in wage
related costs and an increase in telecom and data related expenses partially
offset by a decrease in legal expenses. These expenses, expressed as a
percentage of net service revenues, were 6.1% and 5.8% for the second quarter of
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 did not receive any prompt payment interest in the three
months ended June 30, 2012 and 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 $0.4 million and $0.7 million for the three months ended
June 30, 2012 and 2011, respectively. Interest expense decreased $0.3 million
primarily due to a reduction in outstanding debt.
Income Tax Expense
Our effective tax rates for the three months ended June 30, 2012 and 2011 were
32.8% and 34.1%, 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. The decrease in our second quarter 2012
effective tax rate to 32.8% from 41.0% in the first quarter of 2012 is
principally due to a change in estimate relating to the recognition of 2011
Federal employment opportunity tax credits processed and earned in 2012. Our
effective tax rate for 2012 does not include any earned 2012 Federal employment
opportunity tax credits and will not be recognized until such time that the
Federal employment opportunity tax credits are reinstated.
Results of Operations
Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011
The following table sets forth, for the periods indicated, our unaudited
consolidated results of operations.
Six Months Ended Six Months Ended
June 30, 2012 June 30, 2011 Change
% of % of
Net Service Net Service
Amount Revenues Amount Revenues Amount %
(in thousands, except percentages)
Net service revenues:
Home & Community $ 115,579 83.6 % $ 109,152 80.8 % $ 6,427 5.9 %
Home Health 22,626 16.4 25,942 19.2 (3,316 ) (12.8 )
Total 138,205 100.0 135,094 100.0 3,111 2.3
Operating income (loss) before
corporate expenses:
Home & Community 13,498 11.7 11,345 10.4 2,153 19.0
Home Health (1,210 ) (5.3 ) 1,538 5.9 (2,748 ) (178.7 )
Total segment operating income 12,288 8.9 12,883 9.6 (595 ) (4.6 )
Corporate general and
administrative expenses 8,373 6.1 7,807 5.8 566 7.2
Gain on sale of agency (495 ) (0.4 ) - - (495 ) *
Corporate depreciation and
amortization 335 0.2 380 0.3 (45 ) (11.8 )
Total operating income 4,075 2.9 4,696 3.5 (621 ) (13.2 )
Interest income (128 ) (0.1 ) - - (128 ) *
Interest expense 958 0.7 1,381 1.0 (423 ) (30.6 )
Income from operations before taxes 3,245 2.3 3,315 2.5 (70 ) (2.1 )
Income tax expense 1,152 0.8 1,129 0.9 23 2.0
Net income $ 2,093 1.5 % $ 2,186 1.6 % $ (93 ) (4.3 )%
* Percent information not meaningful
Our net service revenues increased by $3.1 million, or 2.3%, to $138.2 million
for the six months ended June 30, 2012 compared to $135.1 million for the same
period in 2011. This net increase represents 5.9% growth in home & community net
service revenues partially offset by a 12.8% decline in home health net service
revenues. Home & community revenue growth was driven by an increase in average
census and related increase in billable hours partially offset by a slight
decrease in the average revenues per billable hour. Our home health revenue
declined in the six months ended June 30, 2012 due to an adjustment to reduce
estimates of accrued Medicare revenues of approximately $0.9 million that was
recorded in the first quarter of 2012, a decrease in admissions and a loss of
revenues from agencies that were closed or sold.
Total segment operating income, expressed as a percentage of net service
revenues, for the six months ended June 30, 2012 and 2011, was 8.9% and 9.6%,
respectively. Corporate general and administrative expenses increased to 6.1% of
net service revenues for the six months ended June 30, 2012, from 5.8% for the
same period in 2011.
25
--------------------------------------------------------------------------------
Table of Contents
Home & Community Segment
The following table sets forth, for the periods indicated, a summary of our
home & community segment's unaudited results of operations through operating
income, before corporate expenses:
Six Months Ended Six Months Ended
June 30, 2012 June 30, 2011 Change
% of Net % of Net
Service Service
Amount Revenues Amount Revenues Amount %
(in thousands, except percentages)
Net service revenues $ 115,579 100.0 % $ 109,152 100.0 % $ 6,427 5.9 %
Cost of service revenues 86,161 74.5 81,853 75.0 4,308 5.3
Gross profit 29,418 25.5 27,299 25.0 2,119 7.8
General and administrative expenses 14,993 13.0 14,735 13.5 258 1.8
Depreciation and amortization 927 0.8 1,219 1.1 (292 ) (24.0 )
Operating income $ 13,498 11.7 % $ 11,345 10.4 % $ 2,153 19.0 %
Segment Data:
Billable hours (in thousands) 6,851 6,414 437 6.8 %
Billable hours per business day 53,522 50,506 3,016 6.0 %
Revenues per billable hour $ 16.86 $ 17.02 $ (0.16 ) (0.9 )%
Average census 23,447 22,629 818 3.6 %
Net service revenues from state, local and other governmental programs accounted
for 95.4% and 94.5% of home & community net service revenues for the six months
ended June 30, 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 $6.4 million, or 5.9%, to $115.6 million for the
six months ended June 30, 2012 compared to $109.2 million for the same period in
2011. The increase was primarily due to a 3.6% increase in average census and a
related 6.8% increase in billable hours partially offset by a slight decrease in
the average revenues per billable hour by 0.9%.
Gross profit, expressed as a percentage of net service revenues, increased to
25.5% for the six months ended June 30, 2012, from 25.0% for the same period in
2011. This increase is primarily due to a continued focus on field staff
productivity and management of service costs.
General and administrative expenses, expressed as a percentage of net service
revenues decreased to 13.0% for the six months ended June 30, 2012, from 13.5%
for the six months ended June 30, 2011. General and administrative expenses
increased by $0.3 million to $15.0 million as compared to $14.7 million for the
six months ended June 30, 2012 and 2011, respectively. This increase of $0.3
million is primarily due to an increase in telecom and data related costs and an
increase in management bonus expense partially offset by reductions in bad debt
expense due to our continued focus on collections.
Depreciation and amortization, expressed as a percentage of net service
revenues, decreased to 0.8% for the six months ended June 30, 2012, from 1.1%
for the same period in 2011. Amortization of intangibles, which are principally
amortized using accelerated methods, totaled $0.8 million and $1.1 million for
the six months ended June 30, 2012 and 2011, respectively.
26--------------------------------------------------------------------------------
Table of Contents
Home Health Segment
The following table sets forth, for the periods indicated, a summary of our home
health segment's unaudited results of operations through operating income,
before corporate expenses:
Six Months Ended Six Months Ended
June 30, 2012 June 30, 2011 Change
% of Net % of Net
Service Service
Amount Revenues Amount Revenues Amount %
(in thousands, except percentages)
Net service revenues $ 22,626 100.0 % $ 25,942 100.0 % $ (3,316 ) (12.8 )%
Cost of service revenues 12,984 57.4 14,077 54.3 (1,093 ) (7.8 )
Gross profit 9,642 42.6 11,865 45.7 (2,223 ) (18.7 )
General and administrative expenses 10,845 47.9 10,070 38.8 775 7.7
Depreciation and amortization 7 0.0 257 1.0 (250 ) (97.3 )
Operating (loss) income $ (1,210 ) (5.3 )% $ 1,538 5.9 % $ (2,748 ) (178.7 )%
Segment Data:
Medicare admissions 4,183 4,547 (364 ) (8.0 )%
Non-Medicare admissions 2,596 3,321 (725 ) (21.8 )%
Medicare revenues per episode completed $ 2,565 $ 2,528 $ 37 1.5 %
Net service revenues from Medicare accounted for 64.4% and 65.9% of home health
net service revenues for the six months ended June 30, 2012 and 2011,
respectively. Non-Medicare net service revenues, in order of significance,
include Medicaid and other governmental programs, commercial insurers and
private duty payors.
Net service revenues decreased $3.3 million, or 12.8%, to $22.6 million for the
six months ended June 30, 2012, compared to $25.9 million in the same period of
2011. Our home health revenue decline was due to a reduction of estimates of
accrued Medicare revenues of approximately $0.9 million that was recorded in the
first quarter of 2012, a decrease in admissions and a loss of revenues from
agencies that were closed or sold.
Gross profit, expressed as a percentage of net service revenues, decreased to
42.6% for the six months ended June 30, 2012, from 45.7% in the same period of
2011. Excluding the reduction of estimates of accrued Medicare revenues, gross
profit, expressed as a percentage of net service revenues decreased to 44.3% for
the six months ended June 30, 2012. The decrease in gross margin is primarily
due to the reduction in 2012 Medicare payment base rates and a decrease in field
staff productivity.
General and administrative expenses, expressed as a percentage of net service
revenues increased to 47.9% for the six months ended June 30, 2012, from 38.8%
for the same period in 2011. General and administrative expenses increased by
$0.8 million for the six months ended June 30, 2012 to $10.8 million as compared
to $10.0 million for the six months ended June 30, 2011. This increase was due
to an increase in management and administrative staffing costs and related
travel costs, an increase in bad debt expense and other net administrative
expenses partially offset by a decrease in consulting expenses.
Total operating (loss) income expressed as a percentage of net service revenues,
for the six months ended June 30, 2012 and 2011, was (5.3)% and 5.9%,
respectively. Excluding the reduction of estimates of accrued Medicare revenues
discussed above, total operating loss, expressed as a percentage of net service
revenues was (2.0)% for the six months ended June 30, 2012.
Depreciation and amortization, expressed as a percentage of net service
revenues, decreased by 97.3% for the six months ended June 30, 2012. This
decrease is due to the write-off of all intangible assets in the third quarter
of 2011 as a result of an impairment analysis completed.
27
--------------------------------------------------------------------------------
Table of Contents
Corporate General and Administrative Expense
Corporate general and administrative expenses increased $0.6 million, or 7.2%,
to $8.4 million for the six months ended June 30, 2012, from $7.8 million for
the same period in 2011. This increase was primarily due to an increase in wage
related costs and an increase in telecom and data related expenses partially
offset by a decrease in legal expenses. These expenses, expressed as a
percentage of net service revenues, were 6.1% and 5.8% for the six months ended
June 30, 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 approximately $0.1 million in prompt payment
interest for the six months ended June 30, 2012. We did not receive any prompt
payment interest in the six months ended June 30, 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 $1.0 million and $1.4 million for the six months ended
June 30, 2012 and 2011, respectively. Interest expense decreased $0.4 million
primarily due to a reduction in outstanding debt.
Income Tax Expense
Our effective tax rates for the six months ended June 30, 2012 and 2011 were
35.5% and 34.1%, 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. The increase is primarily due to our
estimate of recognizing less tax credits in 2012 as compared to the tax credits
realized in 2011. Our effective tax rate for 2012 does not include any earned
2012 Federal employment opportunity tax credits and will not be recognized until
such time that the Federal employment opportunity tax credits are reinstated.
28
--------------------------------------------------------------------------------
Table of Contents
Liquidity and Capital Resources
Overview
Our primary sources of liquidity are cash from operations and borrowings under
our credit facility. At June 30, 2012 and December 31, 2011, we had cash
balances of $1.5 million and $2.0 million, respectively.
Cash flows from operating activities represent the inflow of cash from our payor
clients and the outflow of cash for payroll and payroll taxes, operating
expenses, interest and taxes. Due to its revenue deficiencies and financing
issues, the State of Illinois has reimbursed us on a delayed basis with respect
to our various agreements including with our largest payor, the Illinois
Department on Aging. The open receivable balance from the State of Illinois
increased by $1.9 million, from $47.4 million as of December 31, 2011 to $49.3
million as of June 30, 2012.
The State of Illinois continues to reimburse us on a delayed basis. These
payment delays have adversely impacted, and may further adversely impact, our
liquidity, and may result in the need to increase borrowings under our credit
facility. Delayed reimbursements from our other state payors have also
contributed to the increase in our receivable balances.
Our credit facility provides (i) maximum aggregate amount of revolving loans
available to us of $55.0 million, (ii) maximum senior debt leverage ratio of
3.00 to 1.0 for the twelve (12) month period ending March 31, 2010 and each
twelve (12) month period ending on the last day of each fiscal quarter
thereafter and (iii) advance multiple of 3.25 used to determine the amount of
the borrowing base.
On March 18, 2010, we entered into the first amendment (the "First Amendment")
to our credit facility. The First Amendment (i) increased the maximum aggregate
amount of revolving loans available to us by $5.0 million to $55.0 million,
(ii) modified our maximum senior debt leverage ratio from 2.75 to 1.0 to 3.00 to
1.0 for the twelve (12) month period ending March 31, 2010 and each twelve
(12) month period ending on the last day of each fiscal quarter thereafter and
(iii) increased the advance multiple used to determine the amount of the
borrowing base from 2.75 to 3.00.
On March 18, 2010, we also amended our subordinated dividend notes that we
issued on November 2, 2009 in the aggregate original principal amount of $12.9
million. Pursuant to the amendments, the dividend notes were amended to
(i) extend the maturity date of the notes from September 30, 2011 to
December 31, 2012, (ii) modify the amortization schedule of the notes to reduce
the annual principal payment amounts from $4.5 million to $1.3 million in 2010;
from $3.3 million to $2.5 million in 2011; and provide for total payments in
2012 of $4.0 million and (iii) permit, based on our leverage ratio, the
prepayment of all or a portion of the principal amount of the notes, together
with interest on the principal amount.
29
--------------------------------------------------------------------------------
Table of Contents
On July 26, 2010, we entered into a second amendment (the "Second Amendment") to
our credit facility. The Second Amendment provided for a $5.0 million term loan
component of the credit facility, the proceeds of which were used to finance a
portion of the purchase price payable in connection with our acquisition of
certain assets of Advantage effective July 25, 2010. The term loan will be
repaid in 24 equal monthly installments, which commenced February 2011. Interest
on the new term loan under the credit facility is payable either at a floating
rate equal to the 30-day LIBOR, plus an applicable margin of 4.6% or the LIBOR
rate for term periods of one, two, three or six months plus a margin of 4.6%.
Interest will be paid monthly or at the end of the relevant interest period. The
term loan has a maturity date of January 5, 2013. 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. The second earn-out payment obligation was
reviewed during the fourth quarter of 2011 and it was revalued at approximately
$0.7 million. The final payment is expected to be made during the third quarter
of 2012.
On May 24, 2011, we entered into a Joinder, Consent and Amendment No. 3 to our
credit facility to include Addus HealthCare (Delaware) Inc., a wholly-owned
subsidiary of Addus HealthCare, as an additional borrower under our credit
facility.
On July 26, 2011, we entered into a fourth amendment (the "Fourth Amendment") to
our credit facility. The Fourth Amendment (i) modified our maximum senior
leverage ratio from 3.00 to 1.00 to 3.25 to 1.00 for each twelve month period
ending on the last of day of each fiscal quarter beginning with the twelve month
period ended June 30, 2011 and (ii) increased the advance multiple used to
determine the amount of the borrowing base from 3.0 to 1.0 to 3.25 to 1.0. The
Fourth Amendment resulted in an increase in the available borrowings under our
credit facility.
On March 2, 2012, we entered into a fifth amendment (the "Fifth Amendment") to
our credit facility. The Fifth Amendment includes technical changes that are
intended to comply with rules promulgated by CMS that restrict lenders from
exercising any rights of set-off of funds on deposit in any lockboxes
established for receiving payments from governmental authorities.
During the fourth quarter of 2011, the lenders under our credit facility
permitted us to add back approximately $1.8 million to adjusted EBITDA for the
purpose of determining availability under the credit facility. The effect of the
add back was to increase availability by approximately $5.8 million until
March 1, 2012. On March 1, 2012, the add back allowance was reduced by $0.2
million and will continue to be reduced by $0.2 million on the first day of each
month thereafter until the add back is eliminated, which will result in a
reduction in availability of $0.65 million on the first day of each month
thereafter until the add back is eliminated.
During the second quarter of 2012, the lenders under our credit facility agreed
to a modified interpretation of the credit facility as it relates to the
calculation of the fixed charge ratio, which provides us with increased
flexibility in meeting this covenant.
As of June 30, 2012 we had $22.0 million outstanding on our credit facility.
After giving effect to the amount drawn on our credit facility, approximately
$7.4 million of outstanding letters of credit, borrowing limits based on an
advanced multiple of adjusted EBITDA and the Fourth Amendment, we had $16.2
million available for borrowing under the credit facility as of June 30, 2012.
While our growth plan is not dependent on the completion of acquisitions, if we
do not have sufficient cash resources or availability under our credit facility,
or we are otherwise prohibited from making acquisitions, our growth could be
limited unless we obtain additional equity or debt financing or unless we obtain
the necessary consents from our lenders. We believe the available borrowings
under our credit facility which, when taken together with cash from operations,
will be sufficient to cover our working capital needs for at least the next 12
months.
Cash Flows
The following table summarizes our cash flows for the six months ended June 30,
2012 and 2011:
Six Months Ended
June 30,
2012 2011
(unaudited)
Net cash provided by operating activities $ 5,732 $ 29,098
Net cash used in investing activities (259 ) (632 )
Net cash used in financing activities (6,000 ) (5,177 )
30
--------------------------------------------------------------------------------
Table of Contents
Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011
Net cash provided by operating activities was $5.7 million for the six months
ended June 30, 2012, compared to $29.1 million for the same period in 2011. This
decrease in operating cash was primarily due to delayed payments in accounts
receivable resulting in a year-over-year cash decrease of $16.4 million from
accounts receivable. The remaining cash provided by operations of $7.0 million
was driven by changes in other working capital accounts.
Net cash used in investing activities was $0.3 million for the six months ended
June 30, 2012. Our investing activities for the six months ended June 30, 2012
were $0.5 million in net proceeds received for the sale of a home health agency
and the purchase of $0.8 million of property and equipment. Our investing
activities for the six months ended June 30, 2011 were $0.1 million for capital
expenditures and a $0.5 million earn-out payment for Advantage.
Net cash used in financing activities was $6.0 million for the six months ended
June 30, 2012 as compared to net cash used of $5.2 million for the six months
ended June 30, 2011. Our financing activities for the six months ended June 30,
2012 were primarily driven by net payments of $2.8 million on the revolving
credit portion of our credit facility, $2.0 million in payments on our
subordinated dividend notes and $1.2 million in payments on our term loan. Our
financing activities for the six months ended June 30, 2011 were primarily
driven by $2.8 million in payments on the revolving credit portion of our credit
facility, $1.0 million in payments on subordinated dividend notes, $1.0 million
in payments on our term loan, and $0.4 million in payments on other notes.
Outstanding Accounts Receivable
Outstanding accounts receivable, net of the allowance for doubtful accounts,
decreased by $3.2 million as of June 30, 2012 as compared to December 31, 2011.
We establish our allowance for doubtful accounts to the extent it is probable
that a portion or all of a particular account will not be collected. Our
provision for doubtful accounts is estimated and recorded primarily by aging
receivables utilizing eight aging categories and applying our historical
collection rates to each aging category, taking into consideration factors that
might impact the use of historical collection rates or payor groups, with
certain large payors analyzed separately from other payor groups. In our
evaluation of these estimates, we also consider other factors including: delays
in payment trends in individual states due to budget or funding issues, billing
conversions related to acquisitions or internal systems, regulatory requirements
for submitting Medicare billing including face-to-face and physical therapy
documentation, resubmission of bills with required documentation and disputes
with specific payors.
Our collection procedures include review of account agings and direct contact
with our payors. We have historically not used collection agencies. An
uncollectible amount, not governed by amount or aging, is written off to the
allowance account only after reasonable collection efforts have been exhausted.
The following tables detail our accounts receivable before reserves by payor
category, showing Illinois governmental payors separately, and segment and the
related allowance amount at June 30, 2012 and December 31, 2011:
31
--------------------------------------------------------------------------------
Table of Contents
June 30, 2012
Over
0-90 Days 91-180 Days 181-365 Days 365 Days Total
(in thousands, except percentages)
Home & Community
Illinois governmental based
programs $ 36,613 $ 10,985 $ 693 $ 451 $ 48,742
Other state, local and other
governmental programs 9,762 893 755 716 12,126
Private duty and commercial 1,663 244 355 713 2,975
48,038 12,122 1,803 1,880 63,843
Home Health
Medicare 4,715 1,875 326 - 6,916
Other state, local and other
governmental programs 1,480 116 189 161 1,946
Private duty and commercial 1,326 263 203 61 1,853
Illinois governmental based
programs 173 180 151 26 530
7,694 2,434 869 248 11,245
Total $ 55,732 $ 14,556 $ 2,672 $ 2,128 $ 75,088
Related aging % 74.2 % 19.4 % 3.6 % 2.8 %
Allowance for doubtful accounts $ 5,947
Reserve as % of gross accounts
receivable 7.9 %
December 31, 2011
Over
0-90 Days 91-180 Days 181-365 Days 365 Days Total
(in thousands, except percentages)
Home & Community
Illinois governmental based
programs $ 33,233 $ 11,969 $ 416 $ 1,110 $ 46,728
Other state, local and other
governmental programs 10,106 1,077 901 1,720 13,804
Private duty and commercial 1,454 482 569 920 3,425
44,793 13,528 1,886 3,750 63,957
Home Health
Medicare 6,109 2,991 991 17 10,108
Other state, local and other
governmental programs 1,617 310 259 251 2,437
Private duty and commercial 1,459 412 369 146 2,386
Illinois governmental based
programs 241 249 119 60 669
9,426 3,962 1,738 474 15,600
Total $ 54,219 $ 17,490 $ 3,624 $ 4,224 $ 79,557
Related aging % 68.2 % 22.0 % 4.6 % 5.2 %
Allowance for doubtful accounts $ 7,189
Reserve as % of gross accounts
receivable 9.0 %
32
--------------------------------------------------------------------------------
Table of Contents
We calculate our days sales outstanding ("DSO") by taking the accounts
receivable outstanding net of the allowance for doubtful accounts and deducting
deferred revenues at the end of the period, divided by the total net service
revenues for the last quarter, multiplied by the number of days in that quarter.
The adjustment for deferred revenues relates to Medicare receivables which are
recorded at the inception of each 60 day episode of care at the full requested
anticipated payment ("RAP") amount. Our DSOs were 87 days and 94 days at
June 30, 2012 and December 31, 2011, respectively. The DSOs for our largest
payor, the Illinois Department on Aging, at June 30, 2012 and December 31, 2011
were 123 days and 125 days, respectively.
Indebtedness
Credit Facility
Our credit facility, most recently amended on March 2, 2012, provides a $55.0
million revolving line of credit expiring November 2, 2014, and a $5.0 million
term loan maturing January 5, 2013, and includes a $15.0 million sublimit for
the issuance of letters of credit. Substantially all of the subsidiaries of
Holdings are co-borrowers, and Holdings has guaranteed the borrowers'
obligations under the credit facility. The credit facility is secured by a first
priority security interest in all of Holdings' and the borrowers' current and
future tangible and intangible assets, including the shares of stock of the
borrowers.
The availability of funds under the revolving credit portion of the credit
facility, as amended, is based on the lesser of (i) the product of adjusted
EBITDA, as defined, for the most recent 12-month period for which financial
statements have been delivered under the credit facility agreement multiplied by
the specified advance multiple, up to 3.25, less the outstanding senior
indebtedness and letters of credit, and (ii) $55.0 million less the outstanding
revolving loans and letters of credit. Interest on the revolving line of credit
and term loan amounts outstanding under the credit facility is payable either at
a floating rate equal to the 30-day LIBOR, plus an applicable margin of 4.6% or
the LIBOR rate for term periods of one, two, three or six months plus a margin
of 4.6%. Interest on the credit facility will be paid monthly on or at the end
of the relevant interest period, as determined in accordance with the credit
facility agreement. The borrowers will pay a fee equal to 0.5% per annum of the
unused portion of the revolving portion of the credit facility. Issued stand-by
letters of credit will be charged at a rate of 2.0% per annum payable monthly. A
balance of $22.0 million was outstanding on our credit facility as of June 30,
2012 and the total availability under the revolving credit loan facility was
$16.2 million at June 30, 2012.
The credit facility contains customary affirmative covenants regarding, among
other things, the maintenance of records, compliance with laws, maintenance of
permits, maintenance of insurance and property and payment of taxes. The credit
facility also contains certain customary financial covenants and negative
covenants that, among other things, include a requirement to maintain a minimum
fixed charge coverage ratio, a requirement to stay below a maximum senior
leverage ratio and a requirement to stay below a maximum permitted amount of
capital expenditures, as well as restrictions on guarantees, indebtedness,
liens, dividends, distributions, investments and loans, subject to customary
carve outs, restrictions on Holdings' and the borrowers' ability to enter into
transactions other than in the ordinary course of business, a restriction on the
ability to consummate more than three acquisitions in any calendar year, or for
the purchase price of any one acquisition to exceed $0.5 million, in each case
without the consent of the lenders, restrictions on mergers, transfers of
assets, acquisitions, equipment, subsidiaries and affiliate transactions,
subject to customary carve outs, and restrictions on fundamental changes and
lines of business. We were in compliance with all of our credit facility
covenants at June 30, 2012.
During the fourth quarter of 2011, the lenders under our credit facility
permitted us to add back approximately $1.8 million to adjusted EBITDA for the
purpose of determining availability under the credit facility. The effect of the
add back was to increase availability by approximately $5.8 million until
March 1, 2012. On March 1, 2012, the add back allowance was reduced by $0.2
million and will continue to be reduced by $0.2 million on the first day of each
month thereafter until the add back is eliminated, which will result in a
reduction in availability of $0.65 million on the first day of each month
thereafter until the add back is eliminated.
During the second quarter of 2012, the lenders under our credit facility agreed
to a modified interpretation of the credit facility as it relates to the
calculation of the fixed charge ratio, which provides us with increased
flexibility in meeting this covenant.
Dividend Notes
On March 18, 2010, we amended our subordinated dividend notes. Pursuant to the
amendments, the dividend notes were amended to (i) extend the maturity date of
the dividend notes from September 30, 2011 to December 31, 2012, (ii) modify the
amortization schedule of the dividend notes to reduce the annual principal
payment amounts from $4.5 million to $1.3 million in 2010; from $3.4 million to
$2.5 million in 2011; and amended total payments in 2012 to $4.1 million, and
(iii) permit, based on our leverage ratio, the prepayment of all or a portion of
the principal amount of the dividend notes, together with interest on the
principal amount. A balance of $2.0 million was outstanding on the dividend
notes as of June 30, 2012.
Off-Balance Sheet Arrangements
As of June 30, 2012, we did not have any off-balance sheet guarantees or
arrangements with unconsolidated entities.
33
--------------------------------------------------------------------------------
Table of Contents
Critical Accounting Policies and Estimates
The discussion and analysis of our financial condition and results of operations
are based on our consolidated financial statements prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of the financial statements requires us to make estimates and assumptions that
affect the reported amounts of assets and liabilities, revenues and expense and
related disclosures. We base our estimates and judgments on historical
experience and other sources and factors that we believe to be reasonable under
the circumstances; however, actual results may differ from these estimates. We
consider the items discussed below to be critical because of their impact on
operations and their application requires our judgment and estimates.
34
--------------------------------------------------------------------------------
Table of Contents
Revenue Recognition
The majority of our home & community segment revenues are derived from Medicaid
programs under agreements with various state and local authorities. These
agreements provide for a service term from one year to an indefinite term.
Services are provided based on authorized hours, determined by the relevant
state or local agency, at an hourly rate specified in the agreement or fixed by
legislation. Services to other payors, such as private or commercial clients,
are provided at negotiated hourly rates and recognized in net service revenues
as services are provided. We provide for appropriate allowances for
uncollectible amounts at the time the services are rendered.
More than half of our home health segment revenues are derived from Medicare.
Home health services are reimbursed by Medicare based on episodes of care. Under
the Medicare Prospective Payment System, or PPS, an episode of care is defined
as a length of care up to 60 days per patient with multiple continuous episodes
allowed. Billings per episode under PPS vary based on the severity of the
patient's condition and are subject to adjustment, both higher and lower, for
changes in the patient's medical condition and certain other reasons. At the
inception of each episode of care, we submit a request for anticipated payment,
or RAP, to Medicare for 50% to 60% of the estimated PPS reimbursement. We
estimate the net PPS revenues to be earned during an episode of care based on
the initial RAP billing, historical trends and other known factors. The net PPS
revenues are initially recognized as deferred net service revenues and
subsequently amortized as net service revenues ratably over the 60-day episodic
period. At the end of each episode of care, a final billing is submitted to
Medicare and any changes between the initial RAP and final billings are recorded
as an adjustment to net service revenues. For open episodes, we estimate net
revenues based on historical data, and adjust net service revenues for the
difference, if any, between the initial RAP and ultimate final claim amount.
The remaining revenues in our home health segment are from state and local
governmental agencies, commercial insurers and private individuals. Services are
primarily provided to these payors on a per visit basis based on negotiated
rates. As such, net service revenues are readily determinable and recognized at
the time the services are rendered. We provide for appropriate allowances for
uncollectible amounts at the time the services are rendered.
Accounts Receivable and Allowance for Doubtful Accounts
We are paid for our services primarily by state and local agencies under
Medicaid programs, Medicare, commercial insurance companies and private
individuals. While our accounts receivable are uncollateralized, our credit risk
is somewhat limited due to the significance of Medicare and state agency payors
to our results of operations. Laws and regulations governing the Medicaid and
Medicare programs are complex and subject to interpretation. Amounts collected
may be different than amounts billed due to client eligibility issues,
insufficient or incomplete documentation, services at levels other than
authorized and other reasons unrelated to credit risk.
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 establish our allowance for doubtful accounts to the extent it is probable
that a portion or all of a particular account will not be collected. Our
allowance for doubtful accounts is estimated and recorded primarily by aging
receivables utilizing eight aging categories and applying our historical
collection rates to each aging category, taking into consideration factors that
might impact the use of historical collection rates or payor groups, with
certain large payors analyzed separately from other payor groups. In our
evaluation of these estimates, we also consider delays in payment trends in
individual states due to budget or funding issues, billing conversions related
to acquisitions or internal systems, resubmission of bills with required
documentation and disputes with specific payors. Historically, we have not
experienced any write-off of accounts as a result of a state operating with
budget deficits. While we regularly monitor state budget and funding
developments for the states in which we operate, we consider losses due to state
credit risk on outstanding balances as remote. We believe that our recorded
allowance for doubtful accounts is sufficient to cover potential losses;
however, actual collections in subsequent periods may require changes to our
estimates.
Goodwill and Other Intangible Assets
Our carrying value of goodwill is the residual of the purchase price over the
fair value of the net assets acquired from various acquisitions including the
acquisition of Addus HealthCare. In accordance with ASC Topic 350, "Goodwill and
Other Intangible Assets," goodwill and intangible assets with indefinite useful
lives are not amortized. We test goodwill for impairment at the reporting unit
level on an annual basis, as of October 1, or whenever potential impairment
triggers occur, such as a significant change in business climate or regulatory
changes that would indicate that impairment may have occurred. Goodwill is
required to be tested for
35
--------------------------------------------------------------------------------
Table of Contents
impairment at least annually using a two-step method. The first step in the
evaluation of goodwill impairment involves comparing the current fair value of
each reporting unit to the recorded value, including goodwill. We use the
combination of a discounted cash flow model ("DCF model") and the market
multiple analysis method to determine the current fair value of each reporting
unit. The DCF model was prepared using revenue and expense projections based on
our current operating plan. As such, a number of significant assumptions and
estimates are involved in the application of the DCF model to forecast revenue
growth, price changes, gross profits, operating expenses and operating cash
flows. The cash flows were discounted using a weighted average cost of capital
of 14.5%, which was management's best estimate based on our capital structure
and external industry data. As part of the second step of this evaluation, if
the carrying value of goodwill exceeds its fair value, an impairment loss would
be recognized.
Based on updates to our business projections and forecasts, and other factors in
2011, we determined that the estimated fair value of our home health reporting
unit was less than the net book value indicating that its allocated goodwill was
impaired. The preliminary assessment for our home & community reportable unit
indicated that its fair value was greater than its net book value with no
initial indication of goodwill impairment.
As permitted by ASC Topic 350, when an impairment indicator arises toward the
end of an interim reporting period, we may recognize our best estimate of that
impairment loss. Based on our preliminary analysis prepared as of June 30, 2011,
we determined that all of the $13.1 million allocated to goodwill for the home
health reportable unit as of September 30, 2011 was impaired and we recorded a
goodwill impairment loss in the third quarter of 2011. The goodwill impairment
charge was noncash in nature and did not affect our liquidity or cash flows from
operating activities. Additionally, the goodwill impairment had no effect on our
borrowing availability or covenants under our credit facility agreement.
The preliminary analysis prepared as of June 30, 2011 was subject to the
completion of our annual impairment test as of October 1, 2011. We completed our
annual impairment test of goodwill as of October 1, 2011 and determined that no
additional impairment charges or adjustments were required. Our home & community
segment had fair values in excess of carrying amounts of approximately $9.1
million, or 8.9% as of October 1, 2011.
Long-Lived Assets
We review our long-lived assets and finite lived intangibles for impairment
whenever changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. To determine if impairment exists, we compare the
estimated future undiscounted cash flows from the related long-lived assets to
the net carrying amount of such assets. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized for
the amount by which the carrying amount of the asset exceeds the estimated fair
value of the asset, generally determined by discounting the estimated future
cash flows. In connection with our assessment of fair value discussed above, we
determined that all of the $2.3 million allocated to home health finite lived
intangibles were impaired and recorded an impairment loss of $2.3 million in the
third quarter of 2011.
We also have indefinite-lived assets that are not subject to amortization
expense such as certificates of need and licenses to conduct specific operations
within geographic markets. Our management has concluded that certificates of
need and licenses have indefinite lives, as management has determined that there
are no legal, regulatory, contractual, economic or other factors that would
limit the useful life of these intangible assets and we intend to renew and
operate the certificates of need and licenses indefinitely. The certificates of
need and licenses are tested annually for impairment. In connection with our
assessment of fair value discussed above, we determined that all of the $0.6
million allocated to home health certificates of need and licenses were impaired
and recorded an impairment loss for 2011.
Workers' Compensation Program
Our workers' compensation insurance program has a $350,000 deductible component.
We recognize our obligations associated with this program in the period the
claim is incurred. The cost of both the claims reported and claims incurred but
not reported, up to the deductible, have been accrued based on historical claims
experience, industry statistics and an actuarial analysis performed by an
independent third party. We monitor our claims quarterly and adjust our reserves
accordingly. These costs are recorded primarily in the cost of services caption
in the consolidated statement of income. Under the agreement pursuant to which
we acquired Addus HealthCare, claims under our workers' compensation insurance
program that relate to December 31, 2005 or earlier are the responsibility of
the selling shareholders in the acquisition, subject to certain limitations. In
August 2010, the FASB issued Accounting Standards Update No 2010-24, Health Care
Entities (Topic 954), "Presentation of Insurance Claims and Related Insurance
Recoveries" ("ASU 2010-24"), which clarifies that companies should not net
insurance recoveries against a related claim liability. Additionally, the amount
of the claim liability should be determined without consideration of insurance
recoveries. As of June 30, 2012 and December 31, 2011, we recorded $1.8 million
in workers' compensation insurance recovery receivables and a corresponding
increase in its workers' compensation liability. The workers' compensation
insurance recovery receivable is included in our prepaid expenses and other
current assets on the balance sheet.
36
--------------------------------------------------------------------------------
Table of Contents
Income Taxes
We account for income taxes under the provisions of ASC Topic 740, "Accounting
for Income Taxes." The objective of accounting for income taxes is to recognize
the amount of taxes payable or refundable for the current year and deferred tax
liabilities and assets for the future tax consequences of events that have been
recognized in our financial statements or tax returns. Deferred taxes, resulting
from differences between the financial and tax basis of our assets and
liabilities, are also adjusted for changes in tax rates and tax laws when
changes are enacted. ASC 740 also requires that deferred tax assets be reduced
by a valuation allowance if it is more likely than not that some portion or all
of the deferred tax asset will not be realized.
