Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2016
OR
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 001-36623
CIVITAS SOLUTIONS, INC.
(Exact name of registrant as specified in its charter)
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Delaware | | 65-1309110 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
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313 Congress Street, 6th Floor Boston, Massachusetts 02210 | | (617) 790-4800 |
(Address of principal executive offices, including zip code) | | (Registrant’s telephone number, including area code) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer | | o | | Accelerated filer | | x |
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Non-accelerated filer | | o (Do not check if smaller reporting company) | | Smaller reporting company | | o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of July 31, 2016, there were 37,131,288 shares outstanding of the registrant’s common stock, $0.01 par value.
TABLE OF CONTENTS
Civitas Solutions, Inc.
PART I. FINANCIAL INFORMATION
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Item 1. | Condensed Consolidated Financial Statements |
Civitas Solutions, Inc.
Condensed Consolidated Balance Sheets
(Amounts in thousands, except share and per share amounts)
(Unaudited)
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| | | | | | | |
| June 30, 2016 | | September 30, 2015 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 19,246 |
| | $ | 41,690 |
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Restricted cash | 870 |
| | 749 |
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Accounts receivable, net of allowances of $11,714 and $11,207 at June 30, 2016 and September 30, 2015 | 161,917 |
| | 145,395 |
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Deferred tax assets, net | 17,519 |
| | 19,648 |
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Prepaid expenses and other current assets | 21,182 |
| | 14,049 |
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Total current assets | 220,734 |
| | 221,531 |
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Property and equipment, net | 173,102 |
| | 168,227 |
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Intangible assets, net | 310,548 |
| | 305,856 |
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Goodwill | 283,839 |
| | 274,520 |
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Restricted cash | 50,000 |
| | 50,000 |
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Other assets | 44,404 |
| | 43,050 |
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Total assets | $ | 1,082,627 |
| | $ | 1,063,184 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 29,581 |
| | $ | 25,890 |
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Accrued payroll and related costs | 77,856 |
| | 82,012 |
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Other accrued liabilities | 54,237 |
| | 46,428 |
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Obligations under capital lease, current | 533 |
| | 497 |
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Current portion of long-term debt | 6,554 |
| | 6,554 |
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Total current liabilities | 168,761 |
| | 161,381 |
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Other long-term liabilities | 77,669 |
| | 79,170 |
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Deferred tax liabilities, net | 56,871 |
| | 58,223 |
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Obligations under capital lease, less current portion | 5,154 |
| | 5,561 |
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Long-term debt, less current portion | 632,868 |
| | 637,574 |
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Commitments and Contingencies (Note 15) |
| |
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Stockholders’ equity | | | |
Common stock, $0.01 par value; 350,000,000 shares authorized; and 37,112,007 and 37,093,237 shares issued and outstanding at June 30, 2016 and September 30, 2015, respectively | 371 |
| | 371 |
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Additional paid-in capital | 293,316 |
| | 277,311 |
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Accumulated loss on derivatives, net of taxes of ($2,856) and ($1,157) at June 30, 2016 and September 30, 2015, respectively | (4,207 | ) | | (1,704 | ) |
Accumulated deficit | (148,176 | ) | | (154,703 | ) |
Total stockholders’ equity | 141,304 |
| | 121,275 |
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Total liabilities and stockholders’ equity | $ | 1,082,627 |
| | $ | 1,063,184 |
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See accompanying notes to these condensed consolidated financial statements.
Civitas Solutions, Inc.
Condensed Consolidated Statements of Operations
(Amounts in thousands, except share and per share amounts)
(Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Net revenue | $ | 353,963 |
| | $ | 345,994 |
| | $ | 1,045,393 |
| | $ | 1,015,764 |
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Cost of revenue | 274,569 |
| | 268,393 |
| | 811,385 |
| | 786,024 |
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Operating expenses: | | | | | | | |
General and administrative | 42,988 |
| | 39,671 |
| | 132,614 |
| | 119,452 |
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Depreciation and amortization | 18,634 |
| | 26,415 |
| | 54,952 |
| | 64,278 |
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Total operating expenses | 61,622 |
| | 66,086 |
| | 187,566 |
| | 183,730 |
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Income from operations | 17,772 |
| | 11,515 |
| | 46,442 |
| | 46,010 |
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Other income (expense): | | | | | | | |
Management fee of related party | — |
| | — |
| | — |
| | (162 | ) |
Other expense, net | (140 | ) | | (386 | ) | | (1,098 | ) | | (333 | ) |
Extinguishment of debt | — |
| | — |
| | — |
| | (17,058 | ) |
Interest expense | (8,493 | ) | | (8,547 | ) | | (25,530 | ) | | (28,868 | ) |
Income (loss) from continuing operations before income taxes | 9,139 |
| | 2,582 |
| | 19,814 |
| | (411 | ) |
Provision (benefit) for income taxes | 4,296 |
| | 1,191 |
| | 13,032 |
| | (185 | ) |
Income (loss) from continuing operations | 4,843 |
| | 1,391 |
| | 6,782 |
| | (226 | ) |
Loss from discontinued operations, net of tax | (27 | ) | | (841 | ) | | (255 | ) | | (966 | ) |
Net income (loss) | $ | 4,816 |
| | $ | 550 |
| | $ | 6,527 |
| | $ | (1,192 | ) |
Income (loss) per common share, basic and diluted | | | | | | | |
Income (loss) from continuing operations | $ | 0.13 |
| | $ | 0.04 |
| | $ | 0.18 |
| | $ | (0.01 | ) |
Loss from discontinued operations | — |
| | (0.03 | ) | | — |
| | (0.02 | ) |
Net income (loss) | $ | 0.13 |
| | $ | 0.01 |
| | $ | 0.18 |
| | $ | (0.03 | ) |
Weighted average number of common shares outstanding, basic | 37,108,486 |
| | 36,950,000 |
| | 37,101,968 |
| | 36,950,000 |
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Weighted average number of common shares outstanding, diluted | 37,252,344 |
| | 37,122,904 |
| | 37,247,784 |
| | 36,950,000 |
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See accompanying notes to these condensed consolidated financial statements.
Civitas Solutions, Inc.
Condensed Consolidated Statements of Comprehensive Income
(Amounts in thousands)
(Unaudited)
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| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Net income (loss) | $ | 4,816 |
| | $ | 550 |
| | $ | 6,527 |
| | $ | (1,192 | ) |
Other comprehensive income (loss), net of tax: | | | | | | | |
Gain (loss) on derivative instrument classified as cash flow hedge, net of tax for the three and nine months ended June 30, 2016 of ($595) and ($1,699), respectively, and $770 and $939 for the three and nine months ended June 30, 2015, respectively
| (877 | ) | | 1,132 |
| | (2,503 | ) | | 1,381 |
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Comprehensive income | $ | 3,939 |
| | $ | 1,682 |
| | $ | 4,024 |
| | $ | 189 |
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See accompanying notes to these condensed consolidated financial statements.
Civitas Solutions, Inc.
Condensed Consolidated Statements of Stockholders’ Equity
(Amounts in thousands, except share amounts)
(Unaudited)
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| | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Accumulated Income (Loss) on Derivatives | | Accumulated Deficit | | Total Stockholders' Equity |
| Shares | | Amount | |
Balance at September 30, 2014 | 36,950,000 |
| | $ | 370 |
| | $ | 272,943 |
| | $ | — |
| | $ | (157,775 | ) | | $ | 115,538 |
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Change in estimate of initial public offering costs | — |
| | — |
| | 576 |
| | — |
| | | | 576 |
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Stock-based compensation | — |
| | — |
| | 3,761 |
| | — |
| | | | 3,761 |
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Other comprehensive income, net of tax | — |
| | — |
| | — |
| | 1,381 |
| | | | 1,381 |
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Net loss | — |
| | — |
| | — |
| | — |
| | (1,192 | ) | | (1,192 | ) |
Balance at June 30, 2015 | 36,950,000 |
| | $ | 370 |
| | $ | 277,280 |
| | $ | 1,381 |
| | $ | (158,967 | ) | | $ | 120,064 |
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| | | | | | | | | | | |
Balance at September 30, 2015 | 37,093,237 |
| | $ | 371 |
| | $ | 277,311 |
| | $ | (1,704 | ) | | $ | (154,703 | ) | | $ | 121,275 |
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Issuance of common stock under employee incentive plans, net of shares surrendered | 18,770 |
| | — |
| | 60 |
| | — |
| | — |
| | 60 |
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Stock-based compensation | — |
| | — |
| | 15,200 |
| | — |
| | — |
| | 15,200 |
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Excess tax benefits from stock-based compensation awards | — |
| | — |
| | 745 |
| | — |
| | — |
| | 745 |
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Other comprehensive loss, net of tax | — |
| | — |
| | — |
| | (2,503 | ) | | — |
| | (2,503 | ) |
Net income | — |
| | — |
| | — |
| | — |
| | 6,527 |
| | 6,527 |
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Balance at June 30, 2016 | 37,112,007 |
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| $ | 371 |
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| $ | 293,316 |
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| $ | (4,207 | ) |
| $ | (148,176 | ) |
| $ | 141,304 |
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See accompanying notes to these condensed consolidated financial statements.
Civitas Solutions, Inc.
Condensed Consolidated Statements of Cash Flows
(Amounts in thousands)
(Unaudited)
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| | | | | | | |
| Nine Months Ended June 30, |
| 2016 | | 2015 |
Operating activities: | | | |
Net income (loss) | $ | 6,527 |
| | $ | (1,192 | ) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | |
Provision for accounts receivable allowances | 10,834 |
| | 11,573 |
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Depreciation and amortization | 54,985 |
| | 53,781 |
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Amortization and write-off of original issue discount and initial purchasers discount | 210 |
| | 4,829 |
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Amortization and write-off of financing costs | 1,169 |
| | 2,749 |
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Stock-based compensation | 15,200 |
| | 3,761 |
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Deferred income taxes | 2,476 |
| | 2,437 |
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Loss on disposal of assets | 722 |
| | 422 |
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Non-cash impairment charge | — |
| | 10,611 |
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Change in fair value of contingent consideration | (556 | ) | | 317 |
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Changes in operating assets and liabilities, net of acquisitions: | | | |
Accounts receivable | (27,356 | ) | | (20,381 | ) |
Other assets | (7,393 | ) | | (12,489 | ) |
Accounts payable | 3,881 |
| | 87 |
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Accrued payroll and related costs | (4,156 | ) | | (1,397 | ) |
Other accrued liabilities | 7,462 |
| | (7,967 | ) |
Other long-term liabilities | (3,364 | ) | | 3,573 |
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Net cash provided by operating activities | 60,641 |
| | 50,714 |
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Investing activities: | | | |
Acquisition of businesses, net of cash acquired | (44,481 | ) | | (38,738 | ) |
Purchases of property and equipment | (31,655 | ) | | (30,310 | ) |
Change in restricted cash | (121 | ) | | 446 |
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Proceeds from sale of assets | 1,219 |
| | 1,068 |
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Net cash used in investing activities | (75,038 | ) | | (67,534 | ) |
Financing activities: | | | |
Issuance of long-term debt, net of original issue discount | — |
| | 54,450 |
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Repayments of long-term debt | (4,916 | ) | | (216,778 | ) |
Proceeds from borrowings under senior revolver | 45,900 |
| | 206,700 |
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Repayments of borrowings under senior revolver | (45,900 | ) | | (206,700 | ) |
Repayments of capital lease obligations | (371 | ) | | (334 | ) |
Cash paid for settlement of acquisition contingent consideration | (3,565 | ) | | — |
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Proceeds from issuance of common stock under employee equity incentive plans | 142 |
| | — |
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Excess tax benefits from stock-based compensation | 745 |
| | — |
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Taxes paid related to net share settlements of restricted stock unit awards | (82 | ) | | — |
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Net cash used in financing activities | (8,047 | ) | | (162,662 | ) |
Net decrease in cash and cash equivalents | (22,444 | ) | | (179,482 | ) |
Cash and cash equivalents at beginning of period | 41,690 |
| | 196,147 |
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Cash and cash equivalents at end of period | $ | 19,246 |
| | $ | 16,665 |
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Supplemental disclosure of cash flow information | | | |
Cash paid for interest | $ | 23,664 |
| | $ | 29,508 |
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Cash paid for call premium on redemption of senior notes | $ | — |
| | $ | 11,688 |
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Cash paid for income taxes | $ | 11,993 |
| | $ | 1,498 |
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Supplemental disclosure of non-cash activities: | | | |
Accrued property and equipment | $ | 1,166 |
| | $ | 996 |
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Fair value of contingent consideration related to acquisitions | $ | — |
| | $ | 6,100 |
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Tenant reimbursements for leasehold improvements
| $ | 2,130 |
| | $ | — |
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See accompanying notes to these condensed consolidated financial statements.
Civitas Solutions, Inc.
Notes to Condensed Consolidated Financial Statements
June 30, 2016
(Unaudited)
1. Business Overview
Civitas Solutions, Inc. ("Civitas"), through its wholly-owned subsidiaries (collectively, the "Company"), is the leading provider of home- and community-based health and human services to individuals with intellectual and/or developmental disabilities, acquired brain injury and other catastrophic injuries and illnesses; and to youth with emotional, behavioral and/or medically complex challenges. Since the Company’s founding in 1980, the Company has evolved into a diversified national network providing an array of high-quality services and care in large, growing and highly-fragmented markets. The Company currently provides services to individuals with intellectual and/or developmental disabilities (“I/DD”), individuals with catastrophic injuries and illnesses, particularly acquired brain injury (“ABI”), youth with emotional, behavioral and/or medically complex challenges, or at-risk youth (“ARY”) and elders in need of day health services to support their independence, or adult day health (“ADH”). Since the Company’s founding in 1980, the Company’s operations have grown to 35 states. The Company provides residential services to approximately 11,500 clients and approximately 16,300 clients receive periodic services from the Company in non-residential settings.
The Company designs customized service plans to meet the individual needs of its clients, which it delivers in home- and community-based settings. Most of the Company’s service plans involve residential support, typically in small group homes, host home settings, or specialized community facilities, designed to improve the clients’ quality of life and to promote their independence and participation in community life. Other services offered include supported living, day and transitional programs, vocational services, case management, family-based and outpatient therapeutic services, post-acute treatment and neurorehabilitation, neurobehavioral rehabilitation and physical, occupational and speech therapies, among others. The Company’s customized service plans offer its clients as well as the payors of these services, an attractive, cost-effective alternative to health and human services provided in large, institutional settings.
Civitas is the parent of a consolidated group of subsidiaries that market their services under The MENTOR Network tradename. Prior to October 1, 2015, Civitas was a partially owned subsidiary of NMH Investment, LLC (“NMH Investment”), which was formed in connection with the acquisition of our business by affiliates of Vestar Capital Partners (“Vestar”) in 2006. The equity interests of NMH Investment were owned by Vestar and certain executive officers, directors and other members of management. On October 1, 2015, in connection with an underwritten secondary offering, NMH Investment distributed all of the 25,250,000 shares of common stock of Civitas it held to its existing members in accordance with their respective membership interests. NMH Holdings, LLC ("NMHH") is a wholly-owned subsidiary of Civitas and National Mentor Holdings, Inc. (“NMHI”) is a wholly-owned subsidiary of NMHH. The financial results of Civitas are primarily composed of the financial results of NMHI and its subsidiaries on a consolidated basis.
2. Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared by the Company in accordance with generally accepted accounting principles (“GAAP”) for interim financial information and pursuant to the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. The unaudited condensed consolidated financial statements herein should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2015, which is on file with the SEC. In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments, consisting of normal and recurring adjustments, necessary to present fairly the financial statements in accordance with GAAP. Intercompany balances and transactions between the Company and its subsidiaries have been eliminated in consolidation. Operating results for the three and nine months ended June 30, 2016 may not necessarily be indicative of results to be expected for any other interim period or for the full year.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Our financial results are affected by the selection and application of accounting policies and methods. There were no material changes in the nine months ended June 30, 2016 to the application of significant accounting policies as described in our audited financial statements for the year ended September 30, 2015.
3. Recent Accounting Pronouncements
Revenue from Contracts with Customers— In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers Topic 606 (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation.
Subsequent to issuing ASU No. 2014-09, the FASB issued the following amendments concerning the adoption and clarification of ASU No. 2014-09. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which delayed the effective date of the new standard for the Company from October 1, 2017 to October 1, 2018. The FASB also agreed to allow entities to choose to adopt the standard as of the original effective date. In March 2016, the FASB issued ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net), which further clarifies the implementation guidance on principal versus agent considerations. The new guidance requires either a retrospective or a modified retrospective approach to adoption. In April 2016, the FASB issued ASU No. 2016-10 Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing, which clarifies the identification of the performance obligations and licensing implementation guidance, while retaining the related principals of those areas. In May 2016, the FASB issued ASU No. 2016-12 Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients, which provides clarification on assessing the collectability criterion, presentation of sales taxes, measurement date for noncash consideration and completed contracts at transition. The Company is evaluating the method of adoption and the potential impact that these ASUs will have on our financial position, results of operations, cash flows, and liquidity.
Imputation of Interest— In April 2015, the FASB issued ASU No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. The new standard requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. In August 2015, the FASB issued ASU No. 2015-15, Interest - Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements, which clarified that debt issuance costs related to line-of-credit arrangements can be presented in the balance sheet as an asset and amortized over the term of the line-of-credit arrangement. The standard is to be applied retrospectively and is effective for fiscal years beginning after December 15, 2015, and interim periods within those years. As of June 30, 2016 and September 30, 2015, the Company had deferred financing costs of $6.3 million and $7.5 million, respectively, within other assets.
Business Combinations— In September 2015, the FASB issued ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. The new standard requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined and sets forth new disclosure requirements related to the adjustments. The standard is to be applied prospectively and is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. Although the impact of applying this standard to prior acquisitions would have been immaterial, the standard could have a significant impact on the accounting for future business combinations after it becomes effective for the Company on October 1, 2016.
Income Taxes— In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. The new standard requires that deferred tax liabilities and assets be classified as non-current in a classified statement of financial position. The amendments in this update apply to all entities that present a classified statement of financial position. The standard can be applied prospectively or retrospectively and is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. As of June 30, 2016 and September 30, 2015, the Company had current deferred tax assets, net of current deferred tax liabilities, of $17.5 million and $19.6 million, respectively.
Leases— In February 2016, the FASB issued ASU No. 2016-02—Leases (Topic 842). The new standard requires that all lessees recognize the assets and liabilities that arise from leases on the balance sheet and disclose qualitative and quantitative information about its leasing arrangements. The standard is to be applied using a modified retrospective approach and is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is currently evaluating the potential impact that this standard may have on its consolidated financial statements.
Stock Compensation— In March 2016, the FASB issued ASU No. 2016-09—Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The areas for simplification in this Update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. The Company is currently evaluating the potential impact that this standard may have on its consolidated financial statements.
4. Long-Term Debt
As of June 30, 2016 and September 30, 2015, the Company’s long-term debt consisted of the following:
|
| | | | | | | |
(in thousands) | June 30, 2016 | | September 30, 2015 |
Term loan principal; principal and interest are due in quarterly installments through January 31, 2021 | $ | 640,669 |
| | $ | 645,585 |
|
Original issue discount on term loan, net of accumulated amortization | (1,247 | ) | | (1,457 | ) |
| 639,422 |
| | 644,128 |
|
Less current portion | 6,554 |
| | 6,554 |
|
Long-term debt | $ | 632,868 |
| | $ | 637,574 |
|
Senior Secured Credit Facilities
NMHI's senior credit agreement (the “senior credit agreement”), as amended, governs a $655.0 million term loan facility (the “term loan facility”), of which $50.0 million was deposited in a cash collateral account in support of the issuance of letters of credit under an institutional letter of credit facility (the “institutional letter of credit facility”), and a $120.0 million senior secured revolving credit facility (the “senior revolver”). The term loan facility has a seven year maturity and the senior revolver has a five year maturity from the effective date, or January 31, 2014. All of the obligations under the senior secured credit facilities are guaranteed by NMHH and the subsidiary guarantors named therein. The senior credit agreement provides that NMHI may make one or more offers to the lenders, and consummate transactions with individual lenders that accept the terms contained in such offers, to extend the maturity date of the lender’s term loans and/or revolving commitments, subject to certain conditions, and any extended term loans or revolving commitments will constitute a separate class of term loans or revolving commitments.
The senior revolver includes borrowing capacity available for letters of credit and for borrowings on same-day notice, referred to as the “swingline loans.” Any issuance of letters of credit or borrowing on a swingline loan will reduce the amount available under the senior revolver. As of June 30, 2016, NMHI had no loans under the senior revolver and $47.4 million of letters of credit issued under the institutional letter of credit facility and $2.9 million of letters of credit issued under the senior revolver.
Borrowings under the senior secured credit facilities bear interest, at our option, at: (i) an alternate base rate ("ABR") equal to the greater of (a) the prime rate of Barclays Bank PLC, (b) the federal funds rate plus 1/2 of 1.0%, and (c) the Eurodollar rate for an interest period of one-month plus 100 basis points, plus 2.25% (provided that the ABR rate applicable to the term loan facility will not be less than 2.00% per annum); or (ii) the Eurodollar rate (provided that the Eurodollar rate applicable to the term loan facility will not be less than 1.00% per annum), plus 3.25%. NMHI is also required to pay a commitment fee to the lenders under the senior revolver at an initial rate of 0.50% of the average daily unutilized commitments thereunder. NMHI must also pay customary letter of credit fees.
The senior credit agreement requires NMHI to make mandatory prepayments, subject to certain exceptions, on a percentage of NMHI's annual Excess Cash Flow, as defined in the senior credit agreement. NMHI determines whether or not a mandatory prepayment is required at the end of each fiscal year. NMHI was not required to make a prepayment for the fiscal year ended September 30, 2015.
Covenants
The senior credit agreement contains negative covenants, including, among other things, limitations on the Company’s ability to incur additional debt, create liens on assets, transfer or sell assets, pay dividends, redeem stock or make other distributions or investments, and engage in certain transactions with affiliates. The senior credit agreement contains a springing financial covenant. If, at the end of any fiscal quarter, the Company’s outstanding borrowings under the senior revolver exceeds 30% of the commitments thereunder, it is required to maintain at the end of each such fiscal quarter a consolidated first lien leverage ratio of not more than 5.50 to 1.00. This consolidated first lien leverage ratio will step down to 5.00 to 1.00 commencing with the fiscal quarter ending March 31, 2017. The springing financial covenant was not in effect as of June 30, 2016 or September 30, 2015 as NMHI’s outstanding borrowings on the senior revolver did not exceed the threshold.
Derivatives
On January 20, 2015, NMHI entered into two interest rate swap agreements in an aggregate notional amount of $375.0 million in order to reduce the variability of cash flows of our variable rate debt. NMHI entered into these interest rate swaps to hedge the risk of changes in the floating rate of interest on borrowings under the term loan. Under the terms of the swaps, NMHI will receive from the counterparty a quarterly payment based on a rate equal to the greater of 3-month LIBOR or 1.00% per annum, and NMHI will make payments to the counterparty based on a fixed rate of 1.795% per annum, in each case on the notional amount of $375.0 million, settled on a net payment basis. The swap agreements expire on March 31, 2020.
The fair value of the swap agreements, representing the price that would be received to transfer the liability in an orderly transaction between market participants, was $7.1 million and $2.9 million as of June 30, 2016 and September 30, 2015, respectively. The fair value was recorded in Other accrued liabilities and was determined based on pricing models and independent formulas using current assumptions. Hedge ineffectiveness, if any, associated with the swap will be reported by the Company in interest expense. There was no ineffectiveness associated with the swap during the nine months ended June 30, 2016, nor was any amount excluded from ineffectiveness testing for the period.
5. Stock-Based Compensation
2014 Plan
Civitas maintains a 2014 Omnibus Incentive Plan (“2014 Plan”). The 2014 Plan authorizes the issuance of stock-based awards, including incentive stock options (“ISOs”), non-qualified stock options (“NSOs”), and restricted stock units (“RSUs”) to purchase up to 5,546,797 shares authorized in the 2014 Plan.
Stock option activity for the nine months ended June 30, 2016 is presented below:
|
| | | | | | | | | | | | |
(in thousands, except share and per share amounts) | Number of Shares | | Weighted- Average Exercise Price per Share | | Weighted- Average Remaining Life (Years) | | Aggregate Intrinsic Value |
Outstanding at September 30, 2015 | 567,900 |
| | $ | 16.98 |
| | | | |
Granted | 216,357 |
| | 25.22 |
| | | | |
Forfeited | 58,469 |
| | 17.94 |
| | | | |
Exercised | 28,480 |
| | 17.02 |
| | | | |
Expired | 1,858 |
| | 17.00 |
| | | | |
Outstanding at June 30, 2016 | 695,450 |
| | $ | 19.46 |
| | 8.6 | | $ | 1,887 |
|
Vested or expected to vest as of June 30, 2016 | 670,727 |
| | $ | 19.38 |
| | 8.6 | | $ | 1,844 |
|
Exercisable at June 30, 2016 | 160,145 |
| | $ | 16.97 |
| | 8.2 | | $ | 618 |
|
The Company utilizes the Black-Scholes valuation model for estimating the fair value of stock options. Options granted under the 2014 Plan during the nine months ended June 30, 2016 were valued using the following assumptions:
|
| | |
| 2016 |
Risk-free interest rate | 1.32% to 1.92% |
|
Expected term | 6 years |
|
Expected volatility | 35.12% to 36.20% |
|
Expected dividend yield | — | % |
Restricted stock unit activity for the nine months ended June 30, 2016 is presented below:
|
| | | | | | |
| Number of Restricted Stock Units | | Weighted Average Grant-Date Fair Value |
Non-vested units at September 30, 2015 | 385,935 |
| | $ | 17.10 |
|
Granted | 265,806 |
| | 24.42 |
|
Forfeited | 43,493 |
| | 18.45 |
|
Vested | 9,415 |
| | 16.84 |
|
Non-vested units at June 30, 2016 | 598,833 |
| | $ | 20.26 |
|
The Company recognizes the fair value of stock options and restricted stock units in net income over the requisite service period of the individual grantee, which generally equals the vesting period.
Under the 2014 Plan, the Company may also grant awards of performance based restricted stock units (“PRSUs”). The number of PRSUs earned is determined based on the Company's attainment of predefined performance targets set by the Compensation Committee. During the nine months ended June 30, 2016 the Company awarded 42,467 PRSUs. The number of PRSUs earned will be determined based on (1) the Company's actual performance against established performance targets in the third year of the three year performance period (the “Performance Condition”) and (2) may be further adjusted based on the performance of the Company’s common stock in relation to the Russell 2000 Healthcare Index (the “Market Condition”). The number of PRSUs earned based on the Performance Condition may range from 0% to 200% of the initial award and thereafter may be increased or decreased by 25% based on the Market Condition. All of the PRSUs will be settled in shares of the Company’s common stock, which will be issued following the end of the three-year performance period, subject to the actual achievement of the predefined performance targets. The Company utilized a Monte Carlo simulation methodology to determine the per share fair value of the PRSU's on the grant date. To calculate compensation expense, the Company forecasts the likelihood of achieving the predefined performance targets and calculates the number of PRSUs expected to be earned.
A summary of PRSU activity for the nine months ended June 30, 2016 is as follows:
|
| | | | | | | | | | | | |
| Initial Number of Performance Based Restricted Stock Units | | Adjustment (1) | | Total Number of Performance Based Restricted Stock Units | | Weighted Average Grant-Date Fair Value |
Non-vested units at September 30, 2015 | — |
| | — |
| | — |
| | $ | — |
|
Granted | 42,467 |
| | — |
| | 42,467 |
| | 19.84 |
|
Forfeited | — |
| | — |
| | — |
| | — |
|
Vested | — |
| | — |
| | — |
| | — |
|
Non-vested units at June 30, 2016 | 42,467 |
| | — |
| | 42,467 |
| | $ | 19.84 |
|
(1) Represents an increase or decrease in the number of PRSUs awarded based on either (a) the final performance criteria achievement at the end of the defined performance period or (b) a change in estimated awards based on the forecasted performance against the predefined targets.
The Company recorded stock-based compensation expense for awards issued under the 2014 Plan of $1.8 million and $4.7 million during the three and nine months ended June 30, 2016, and $1.4 million and $3.8 million during the three and nine months ended June 30, 2015. Stock-based compensation expense is included in general and administrative expense in the consolidated statements of operations.
Unit Plan
Prior to October 1, 2015, NMH Investment maintained the Amended and Restated 2006 Unit Plan (the “Unit Plan”). Under the plan NMH Investment issued units of limited liability company interests pursuant to such plan, consisting of Class B Common Units, Class C Common Units, Class D Common Units, Class E Common Units, Class F Common Units, Class G Common Units and Class H Common Units. These units derived their value from the value of the Company.
On October 1, 2015, in connection with a secondary offering, NMH Investment distributed all of the 25,250,000 shares of our common stock it held to its existing members in accordance with their respective membership interests and pursuant to the terms of the NMH Investment's Limited Liability Company Agreement and the management unitholders agreements (the “Distribution”). The Distribution triggered the vesting condition for the Class H Common Units and the acceleration of unvested Class F Common Units. As a result, the Company recorded compensation expense of $10.5 million related to these awards during the quarter ended December 31, 2015. This expense is not deductible for tax purposes. During the nine months ended June 30, 2016 the Company recorded compensation expense of $10.5 million for the Distribution, and during the three and nine months ended June 30, 2015 the Company recorded compensation expense of $33 thousand and $112 thousand, respectively, for awards issued under the Unit Plan. The expense is included in general and administrative expense in the consolidated statements of operations. As a result of the Distribution, the Unit Plan has concluded and there will be no future issuances under this plan.
6. Business Combinations
The operating results of the businesses acquired are included in the consolidated statements of operations from the date of acquisition. The Company accounted for the acquisitions under the acquisition method and, as a result, the purchase price was allocated to the assets acquired and liabilities assumed based upon their respective fair values. The excess of the purchase price over the estimated fair value of net tangible assets was allocated to specifically identified intangible assets, with the residual being allocated to goodwill.
Fiscal 2016 Acquisitions
During the nine months ended June 30, 2016, the Company acquired the assets of ten companies complementary to its business for a total fair value consideration of $44.5 million.
Mother's Touch, LLC ("Mother's Touch"). On November 30, 2015, the Company acquired the assets of Mother's Touch for $3.4 million. Mother's Touch is located in Indiana and provides residential and community-based services to individuals with developmental disabilities. The Company acquired $2.7 million of identified intangible assets which included $2.7 million of agency contracts with a weighted average useful life of 12 years and $14 thousand of other intangible assets. The estimated fair values of the intangible assets acquired at the date of acquisition are determined based on a valuation that has been finalized. As a result of the acquisition, the Company recorded $0.7 million of goodwill in the Human Services segment, which is expected to be deductible for tax purposes.
Winways, LLC ("Winways"). On December 31, 2015, the Company acquired the assets of Winways for $0.8 million. Winways is located in California and provides residential and day treatment services to individuals with traumatic brain injuries, neurological illnesses and similar conditions. The Company acquired $0.6 million of identified intangible assets which included $0.5 million of agency contracts with a weighted average useful life of 12 years and $0.1 million of other intangible assets. The estimated fair values of the intangible assets acquired at the date of acquisition are determined based on a valuation that has been finalized. As a result of this acquisition, the Company recorded $0.1 million of goodwill in the Post Acute Specialty-Rehabilitation Services segment, which is expected to be deductible for tax purposes.
Triumph Rehabilitation, LLC ("Triumph"). On February 1, 2016, the Company acquired the assets of Triumph for $2.6 million. Triumph is located in Michigan and provides physical therapy, rehabilitation and related services to individuals with traumatic brain injuries, neurological illnesses, and similar conditions. The Company acquired $2.3 million of identified intangible assets which included $2.2 million of agency contracts with a weighted average useful life of 12 years and $0.1 million of other intangible assets. The estimated fair values of the intangible assets acquired at the date of acquisition are determined based on a valuation that has been finalized. As a result of this acquisition, the Company recorded $0.3 million of goodwill in the Post Acute Specialty-Rehabilitation Services segment, which is expected to be deductible for tax purposes.
Brighton Worcester Massachusetts Adult Day Health, Inc. ("Brighton Worcester ADH"). On February 1, 2016 the Company acquired the assets of Brighton Worcester ADH for $13.6 million. Brighton Worcester ADH is located in Massachusetts and provides nursing and health oversight, medication management, therapy services,
nutritional and dietary services, counseling and case management to elders. The Company acquired $10.6 million of identified intangible assets which included $9.9 million of agency contracts with a weighted average useful life of 12 years, $0.7 million of tradenames with a weighted average useful life of 5 years and $40 thousand of other intangible assets. The estimated fair values of the intangible assets acquired at the date of acquisition are determined based on a valuation that has been finalized. As a result of this acquisition, the Company recorded $2.7 million of goodwill in adult day health services as part of the Human Services segment, which is expected to be deductible for tax purposes.
Tender Loving Care Duluth, LLC ("TLC Duluth"). On February 29, 2016, the Company acquired the assets of TLC Duluth for $8.5 million. TLC Duluth is located in Minnesota and provides full-time services in the community residential setting for individuals with developmental disabilities, traumatic brain injuries or mental illness. The Company acquired $7.1 million of identified intangible assets which included $6.2 million of agency contracts with a weighted average useful life of 12 years and $1.0 million of other intangible assets. The estimated fair values of the intangible assets acquired at the date of acquisition are determined based on a valuation that has been finalized. As a result of this acquisition, the Company recorded $1.3 million of goodwill in the Human Services segment, which is expected to be deductible for tax purposes.
Maryland Adult Day Health, Inc. ("Maryland ADH"). On March 14, 2016, the Company acquired the assets of Maryland ADH for $12.3 million. Maryland ADH is located in Maryland and provides adult day health care services to the Medicaid eligible elderly population. The Company acquired $7.7 million of identified intangible assets which included $6.7 million of agency contracts with a weighted average useful life of 12 years, $1.0 million of tradenames with a weighted average useful life of 5 years, and $40 thousand of other intangible assets. In addition, the Company acquired total tangible assets, consisting primarily of vehicles, of $0.7 million. The estimated fair values of the intangible assets acquired at the date of acquisition are determined based on a valuation that has been finalized. As a result of this acquisition, the Company recorded $3.9 million of goodwill in adult day health services as part of the Human Services segment, which is expected to be deductible for tax purposes.
Eagle Crest Center, LLC ("Eagle Crest"). On March 15, 2016, the Company acquired the assets of Eagle Crest for $2.0 million. Eagle Crest is located in California and provides skilled nursing services and related services to individuals with traumatic brain injuries, spinal cord injuries, neuro-muscular or congenital anomalies, and similar conditions. The Company acquired $1.7 million of intangible assets which included $1.4 million of agency contracts with a weighted average useful life of 12 years and $0.3 million of other intangible assets. The estimated fair values of the intangible assets acquired at the date of acquisition are determined based on a valuation that has been finalized. As a result of this acquisition, the Company recorded $0.3 million of goodwill in the Post Acute Specialty-Rehabilitation Services segment, which is expected to be deductible for tax purposes.
CRM Habilitative Services, Inc. ("CRM"). On March 31, 2016, the Company acquired the assets of CRM for $1.1 million. CRM is located in Pennsylvania and provides group home services and day program services and related services to individuals with intellectual and developmental disabilities. The Company acquired $0.9 million of intangible assets which included $0.8 million of agency contracts with a weighted average useful life of 12 years and $0.2 million of other intangible assets. The estimated fair values of the intangible assets acquired at the date of acquisition are determined based on a valuation that has been finalized. As a result of this acquisition, the Company recorded $0.1 million of goodwill in the Human Services segment, which is expected to be deductible for tax purposes.
Other acquisitions. During fiscal 2016, the Company acquired the assets of Resources for Human Development ("RHD"), and Learning Services, Inc. ("Learning Services"). RHD is in the business of providing residential group home services to individuals with developmental disabilities and similar conditions and is included in our Human Services segment. Learning Services is engaged in the business of providing supported living and rehabilitation services for individuals with acquired brain injuries and similar conditions and is included in our Post Acute Specialty-Rehabilitation Services segment. Total cash consideration for these companies was $161 thousand.
The following table summarizes the recognized amounts of identifiable assets acquired at the date of each acquisition:
|
| | | | | | | | | | | | | | | | | | | |
(in thousands) | Identifiable Intangible Assets | | Tangible Assets | | Total Identifiable Assets | | Goodwill | | Purchase Consideration |
Mother's Touch | $ | 2,741 |
| | $ | 9 |
| | $ | 2,750 |
| | $ | 650 |
| | $ | 3,400 |
|
Winways | 619 |
| | 29 |
| | 648 |
| | 108 |
| | 756 |
|
Triumph | 2,335 |
| | — |
| | 2,335 |
| | 265 |
| | 2,600 |
|
Brighton Worcester ADH | 10,600 |
| | 363 |
| | 10,963 |
| | 2,677 |
| | 13,640 |
|
TLC Duluth | 7,132 |
| | 26 |
| | 7,158 |
| | 1,342 |
| | 8,500 |
|
Maryland ADH | 7,680 |
| | 748 |
| | 8,428 |
| | 3,856 |
| | 12,284 |
|
Eagle Crest | 1,698 |
| | — |
| | 1,698 |
| | 302 |
| | 2,000 |
|
CRM | 934 |
| | 87 |
| | 1,021 |
| | 119 |
| | 1,140 |
|
RHD | 18 |
| | 43 |
| | 61 |
| | — |
| | 61 |
|
Learning Services | 100 |
| | — |
| | 100 |
| | — |
| | 100 |
|
Total | $ | 33,857 |
| | $ | 1,305 |
| | $ | 35,162 |
| | $ | 9,319 |
| | $ | 44,481 |
|
The Company has not separately disclosed the operating results of these businesses during the three and nine months ended June 30, 2016 because they are immaterial.
7. Pro Forma Results of Operations
The following table reflects the unaudited pro forma results of operations for the three and nine months ended June 30, 2016 and 2015 assuming that the acquisitions made during the three and nine months ended June 30, 2016 and 2015 had occurred on October 1, 2014 and 2013, respectively.
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
(in thousands) | 2016 | | 2015 | | 2016 | | 2015 |
Net revenue | $ | 355,024 |
| | $ | 357,647 |
| | $ | 1,062,972 |
| | $ | 1,063,290 |
|
Net income | 4,872 |
| | 2,670 |
| | 9,790 |
| | 7,795 |
|
The unaudited pro forma information is presented for informational purposes only and is not necessarily indicative of the actual results that would have been achieved had the acquisitions occurred as of October 1, 2014 and 2013, or the results that may be achieved in future periods.
8. Goodwill and Intangible Assets
Goodwill
The changes in goodwill for the nine months ended June 30, 2016 are as follows (in thousands):
|
| | | | | | | | | | | |
| Human Services | | Post -Acute Specialty Rehabilitation Services | | Total |
Balance as of September 30, 2015 | $ | 193,286 |
| | $ | 81,234 |
| | $ | 274,520 |
|
Goodwill acquired through acquisitions | 8,644 |
| | 675 |
| | 9,319 |
|
Balance as of June 30, 2016 | $ | 201,930 |
| | $ | 81,909 |
| | $ | 283,839 |
|
Intangible Assets
Intangible assets consist of the following as of June 30, 2016 (in thousands):
|
| | | | | | | | | | | | | | |
Description | Weighted Average Amortization Period | | Gross Carrying Value | | Accumulated Amortization | | Intangible Assets, Net |
Agency contracts | 8 years |
| | $ | 499,094 |
| | $ | 248,989 |
| | $ | 250,105 |
|
Non-compete/non-solicit agreements | 2 years |
| | 6,438 |
| | 4,242 |
| | 2,196 |
|
Relationship with contracted caregivers | — |
| | 7,521 |
| | 7,479 |
| | 42 |
|
Trade names | 2 years |
| | 6,516 |
| | 3,818 |
| | 2,698 |
|
Trade names (indefinite life) | — |
| | 45,800 |
| | — |
| | 45,800 |
|
Licenses and permits | 2 years |
| | 49,711 |
| | 40,005 |
| | 9,706 |
|
Intellectual property | — |
| | 452 |
| | 451 |
| | 1 |
|
| | | $ | 615,532 |
| | $ | 304,984 |
| | $ | 310,548 |
|
Intangible assets consist of the following as of September 30, 2015 (in thousands):
|
| | | | | | | | | | | | | | |
Description | Weighted Average Amortization Period | | Gross Carrying Value | | Accumulated Amortization | | Intangible Assets, Net |
Agency contracts | 8 years |
| | $ | 468,549 |
| | $ | 225,383 |
| | $ | 243,166 |
|
Non-compete/non-solicit | 2 years |
| | 6,097 |
| | 3,477 |
| | 2,620 |
|
Relationship with contracted caregivers | 1 year |
| | 7,521 |
| | 6,915 |
| | 606 |
|
Trade names | 2 years |
| | 4,883 |
| | 3,343 |
| | 1,540 |
|
Trade names (indefinite life) | — |
| | 45,800 |
| | — |
| | 45,800 |
|
Licenses and permits | 2 years |
| | 48,395 |
| | 36,314 |
| | 12,081 |
|
Intellectual property | 1 year |
| | 452 |
| | 409 |
| | 43 |
|
| | | $ | 581,697 |
| | $ | 275,841 |
| | $ | 305,856 |
|
Amortization expense was $10.1 million and $29.2 million for the three and nine months ended June 30, 2016, respectively, and $9.9 million and $29.2 million for the three and nine months ended June 30, 2015, respectively.
The estimated remaining amortization expense related to intangible assets with finite lives for the three months remaining in fiscal 2016 and each of the four succeeding years and thereafter is as follows:
|
| | | |
(in thousands) | |
2016 | $ | 9,026 |
|
2017 | 35,817 |
|
2018 | 34,956 |
|
2019 | 34,673 |
|
2020 | 33,877 |
|
Thereafter | 116,399 |
|
Total | $ | 264,748 |
|
9. Related Party Transactions
Lease Agreements
The Company leases several offices, homes and other facilities from its employees, or from relatives of employees, primarily in the states of Minnesota, California and Wisconsin. These leases were entered into in the ordinary course of business and negotiated at an arm’s length. These leases have various expiration dates extending out through September 2020. Related party lease expense was $0.2 million and $0.5 million for the three and nine months ended June 30, 2016 and $0.2 million and $0.6 million for the three and nine months ended June 30, 2015.
10. Fair Value Measurements
The Company measures and reports its financial assets and liabilities on the basis of fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
A three-level hierarchy for disclosure has been established to show the extent and level of judgment used to estimate fair value measurements, as follows:
Level 1: Quoted market prices in active markets for identical assets or liabilities.
Level 2: Significant other observable inputs (quoted prices in active markets for similar assets or liabilities, quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability).
Level 3: Significant unobservable inputs for the asset or liability. These values are generally determined using pricing models which utilize management estimates of market participant assumptions.
Valuation techniques for assets and liabilities measured using Level 3 inputs may include methodologies such as the market approach, the income approach or the cost approach, and may use unobservable inputs such as projections, estimates and management’s interpretation of current market data. These unobservable inputs are only utilized to the extent that observable inputs are not available or cost-effective to obtain.
A description of the valuation methodologies used for instruments measured at fair value as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.
The following table sets forth the Company’s assets and liabilities that were accounted for at fair value on a recurring basis as of June 30, 2016.
|
| | | | | | | | | | | | | | | |
(in thousands) | Total | | Quoted Market Prices (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Liabilities | | | | | | | |
Interest rate swap agreements | $ | (7,063 | ) | | $ | — |
| | $ | (7,063 | ) | | $ | — |
|
Contingent consideration | $ | (4,954 | ) | | $ | — |
| | $ | — |
| | $ | (4,954 | ) |
The following table sets forth the Company’s assets and liabilities that were accounted for at fair value on a recurring basis as of September 30, 2015.
|
| | | | | | | | | | | | | | | |
(in thousands) | Total | | Quoted Market Prices (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
Liabilities | | | | | | | |
Interest rate swap agreements | $ | (2,861 | ) | | $ | — |
| | $ | (2,861 | ) | | $ | — |
|
Contingent consideration | $ | (9,075 | ) | | $ | — |
| | $ | — |
| | $ | (9,075 | ) |
Interest rate-swap agreements. The Company’s interest rate-swap agreements are classified within Level 2 of the fair value hierarchy. The fair value of the swap agreements is recorded in current liabilities (under other accrued liabilities) in the Company’s consolidated balance sheets. The fair value of these agreements is determined based on pricing models and independent formulas using current assumptions that included swap terms, interest rates and forward LIBOR curves and the Company’s credit risk.
Contingent consideration. In connection with the acquisition of Mass Adult Day Health (“Adult Day Health”) in September 2014 and Cassell in January 2015, the Company recorded contingent consideration pertaining to the amounts potentially payable to the former owners upon the businesses achieving certain performance targets.
The fair values of the Company's contingent consideration obligations are based on a probability-weighted approach derived from the overall likelihood of achieving certain performance targets. The resultant probability-weighted earn-out payments are discounted using a discount rate based upon the weighted-average cost of capital. The fair value measurement is based on significant inputs not observable in the market, which represent Level 3 inputs within the fair value hierarchy. The valuation of contingent consideration uses assumptions the Company believes would be made by a market participant. The Company assesses these estimates on an ongoing basis as additional data impacting the assumptions is obtained. Increases or decreases in the fair values of the contingent consideration obligations may result from changes in discount periods and rates, changes in the timing and amount of earn-out criteria and changes in probability assumptions with respect to the likelihood of achieving the various earn-out criteria. Changes in the fair value of contingent consideration related to updated assumptions and estimates are recognized in General and administrative expense within the consolidated statements of operations.
The following table presents a summary of changes in fair value of the Company’s Level 3 liabilities measured on a recurring basis for the nine months ended June 30, 2016.
|
| | | |
(in thousands) | Nine Months Ended June 30, 2016 |
Balance at September 30, 2015 | $ | 9,075 |
|
Present value accretion | (211 | ) |
Cassell fair value adjustment | (2,945 | ) |
Balance at December 31, 2015 | $ | 5,919 |
|
Payment | (1,307 | ) |
Balance at March 31, 2016 | $ | 4,612 |
|
Cassell and Mass ADH fair value adjustment | 2,600 |
|
Payment | (2,258 | ) |
Balance at June 30, 2016 | $ | 4,954 |
|
As of June 30, 2016 and September 30, 2015, the Company had $5.0 million and $9.1 million of contingent consideration, of which approximately $5.0 million and $3.9 million were reflected in Other accrued liabilities, respectively. As of September 30, 2015, $5.2 million was reflected in Other long-term liabilities. The $0.6 million fair value adjustment and reversal of present value accretion during the nine months ended June 30, 2016 relates to the Cassell and Mass ADH acquisitions and reflects the revised estimate from the date of acquisition of expected operating performance during the two year earn out period which ends January 31, 2017.
During the nine months ended June 30, 2016, the Company made payments of $1.3 million and $2.3 million for contingent consideration related to the Adult Day Health and Cassell acquisitions, respectively.
At June 30, 2016 and September 30, 2015, the carrying values of cash, accounts receivable, accounts payable and variable rate debt approximated fair value.
11. Income Taxes
The Company’s effective income tax rate for the interim periods is based on management’s estimate of the Company’s annual effective tax rate for the applicable year. It is also affected by discrete items that may occur in any given period. For the three and nine months ended June 30, 2016, the Company’s effective income tax rate was 47.0% and 65.8%, respectively, as compared to an effective tax rate of 46.1% and 45.0% for the three and nine months ended June 30, 2015, respectively. These rates differ from the federal statutory income tax rate primarily due to state income taxes and nondeductible permanent differences such as meals and nondeductible compensation. The higher effective tax rate for the nine months ended June 30, 2016 is primarily due to $10.5 million of stock-based compensation expense related to certain awards under our former equity compensation plan that vested in October 2015. This expense is not deductible for tax purposes and was considered a discrete item. Therefore, the entire impact of the expense on income taxes was recorded during the first quarter of fiscal 2016 and is included in the nine months ended June 30, 2016.
The Company files a federal consolidated return and files various state income tax returns and, generally, is no longer subject to income tax examinations by the taxing authorities for years prior to September 30, 2013. The Company did not have a reserve for uncertain income tax positions at June 30, 2016 and September 30, 2015. The Company does not expect any significant changes to unrecognized tax benefits within the next twelve months. The Company’s policy is to recognize interest and penalties related to unrecognized tax benefits as charges to income tax expense.
12. Segment Information
The Company conducts its business through two reportable business segments: the Human Services Segment and the Post-Acute Specialty Rehabilitation Services (“SRS”) Segment.
Through the Human Services Segment, the Company primarily provides home- and community-based human services to adults and children with intellectual and developmental disabilities (“I/DD”), and to youth with emotional, behavioral and/or medically complex challenges (“ARY”) and, beginning in fiscal 2014, to elders. The operations of the Human Services Segment have been organized by management into three operating segments based upon geography and clients served.
Through the SRS Segment, the Company delivers services to individuals who have suffered acquired brain injury, spinal injuries and other catastrophic injuries and illnesses. The operations of the SRS Segment have been organized by management into two operating segments, NeuroRestorative and CareMeridian, based upon service type. The NeuroRestorative operating group provides behavioral therapies to brain injured clients in post-acute community settings and the CareMeridian operating group provides a higher level of medical support to traumatically injured clients.
Each operating segment is aligned with the Company’s reporting structure and has a segment manager that is directly accountable for its operations and regularly reports results to the chief operating decision maker, which is the Company's Chief Operating Officer, for the purpose of evaluating these results and making decisions regarding resource allocations.
The Company evaluates performance based on EBITDA. EBITDA for each segment is defined as income (loss) from continuing operations for the segment before income taxes, before depreciation and amortization, intangible impairments, and interest income (expense).
Activities classified as “Corporate” in the table below relate primarily to unallocated home office expenses, management fees, and debt extinguishment costs.
The following table is a financial summary by reportable segments for the periods indicated (in thousands):
|
| | | | | | | | | | | | | | | |
For the three months ended June 30, | Human Services | | Post-Acute Specialty Rehabilitation Services | | Corporate | | Consolidated |
2016 | | | | | | | |
Net revenue | $ | 280,457 |
| | $ | 73,506 |
| | $ | — |
| | $ | 353,963 |
|
EBITDA | 42,463 |
| | 14,391 |
| | (20,591 | ) | | 36,263 |
|
Total assets | 642,423 |
| | 257,254 |
| | 182,950 |
| | 1,082,627 |
|
Depreciation and amortization | 12,148 |
| | 5,827 |
| | 659 |
| | 18,634 |
|
Purchases of property and equipment | 7,684 |
| | 2,492 |
| | 2,460 |
| | 12,636 |
|
2015 | | | | | | | |
Net revenue | $ | 278,398 |
| | $ | 67,596 |
| | $ | — |
| | $ | 345,994 |
|
EBITDA(1) | 40,873 |
| | 12,776 |
| | (15,961 | ) | | 37,688 |
|
Depreciation and amortization | 19,790 |
| | 5,995 |
| | 630 |
| | 26,415 |
|
Purchases of property and equipment | 5,800 |
| | 4,200 |
| | 599 |
| | 10,599 |
|
(1) The performance measures previously reported for the three months ended June 30, 2015 have been revised from Income (loss) from continuing operations before income taxes to EBITDA.
A reconciliation of EBITDA to income from continuing operations on a consolidated basis is as follows (in thousands):
|
| | | | | | | |
| For the three months ended June 30, |
| 2016 | | 2015 |
EBITDA | $ | 36,263 |
| | $ | 37,688 |
|
Less: | | | |
Depreciation and amortization | 18,634 |
| | 26,415 |
|
Interest expense, net | 8,490 |
| | 8,691 |
|
Income from continuing operations before income taxes | $ | 9,139 |
| | $ | 2,582 |
|
|
| | | | | | | | | | | | | | | |
For the nine months ended June 30, | Human Services | | Post-Acute Specialty Rehabilitation Services | | Corporate | | Consolidated |
2016 | | | | | | | |
Net revenue | $ | 831,844 |
| | $ | 213,549 |
| | $ | — |
| | $ | 1,045,393 |
|
EBITDA | 122,879 |
| | 40,471 |
| | (63,284 | ) | | 100,066 |
|
Total assets | 642,423 |
| | 257,254 |
| | 182,950 |
| | 1,082,627 |
|
Depreciation and amortization | 35,281 |
| | 17,639 |
| | 2,032 |
| | 54,952 |
|
Purchases of property and equipment | 19,691 |
| | 7,769 |
| | 4,195 |
| | 31,655 |
|
2015 | | | | | | | |
Net revenue | $ | 820,112 |
| | $ | 195,652 |
| | $ | — |
| | $ | 1,015,764 |
|
EBITDA(1) | 123,115 |
| | 36,366 |
| | (66,496 | ) | | 92,985 |
|
Depreciation and amortization | 45,303 |
| | 17,137 |
| | 1,838 |
| | 64,278 |
|
Purchases of property and equipment | 15,803 |
| | 12,162 |
| | 2,345 |
| | 30,310 |
|
(1) The performance measures previously reported for the nine months ended June 30, 2015 have been revised from Income (loss) from continuing operations before income taxes to EBITDA.
A reconciliation of EBITDA to income (loss) from continuing operations on a consolidated basis is as follows (in thousands):
|
| | | | | | | |
| For the nine months ended June 30, |
| 2016 | | 2015 |
EBITDA | $ | 100,066 |
| | $ | 92,985 |
|
Less: | | | |
Depreciation and amortization | 54,952 |
| | 64,278 |
|
Interest expense, net | 25,300 |
| | 29,118 |
|
Income (loss) from continuing operations before income taxes | $ | 19,814 |
| | $ | (411 | ) |
Revenue derived from contracts with state and local governmental payors in the state of Minnesota, the Company’s largest state operation, which is included in the Human Services segment, accounted for approximately 15% of the Company’s net revenue for the three and nine months ended June 30, 2016 and 2015.
13. Disposition of Business
During fiscal 2015, the Company decided to discontinue ARY services in the states of Florida, Louisiana, Indiana, North Carolina and Texas. These operations are included in the Human Services Segment. On December 1, 2015, the Company completed the sale of our ARY operations in the state of North Carolina. As consideration, the buyer assumed our lease and service delivery obligations in exchange for the assets of the business, excluding working capital items, and a cash payment of $1.3 million to the buyer. Upon the completion of the sale, the Company recorded a loss of $1.3 million. The closures of the ARY operations in Florida and Louisiana were complete as of December 31, 2015 and the closures of our ARY operations in Indiana and Texas were completed in January 2016. During the nine months ended June 30, 2016 the Company recorded cash charges of approximately $2.0 million, consisting of severance costs of $0.5 million and lease termination costs of $1.5 million.
The Company assessed the disposal group under the guidance of ASU 2014-08, Discontinued Operations and Disclosures of Disposals of Components of an Entity and concluded that the closure of the disposal group does not represent a "strategic shift" and therefore has not been classified as discontinued operations for any of the periods presented. However, the Company has concluded that the disposal group was an individually significant disposal group. Pretax losses for this disposal group were $0.2 million and $5.8 million for the three and nine months ended June 30, 2016, respectively, and $8.8 million and $11.2 million for the three and nine months ended June 30, 2015, respectively. Pretax losses for the nine months ended June 30, 2016 included exit costs of $2.0 million disclosed above.
14. Net Income (Loss) Per Share
Basic net income (loss) per common share is computed by dividing net income (loss) by the basic weighted average number of common shares outstanding during the period. Diluted net income per common share, if applicable, is computed by dividing net income by the diluted weighted average number of common shares and common
equivalent shares outstanding during the period. The weighted average number of common equivalent shares outstanding has been determined in accordance with the treasury-stock method. Common equivalent shares consist of common stock issuable on the exercise of outstanding options and vesting of restricted stock units when dilutive.
The following table sets forth the computation of basic and diluted earnings per share (“EPS”):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
(in thousands, except share and per share amounts) | 2016 | | 2015 | | 2016 | | 2015 |
Numerator | | | | | | | |
Net income (loss) | $ | 4,816 |
| | $ | 550 |
| | $ | 6,527 |
| | $ | (1,192 | ) |
Denominator | | | | | | | |
Weighted average shares outstanding, basic | 37,108,486 |
| | 36,950,000 |
| | 37,101,968 |
| | 36,950,000 |
|
Weighted average common equivalent shares | 143,858 |
| | 172,904 |
| | 145,816 |
| | — |
|
Weighted average shares outstanding, diluted | 37,252,344 |
| | 37,122,904 |
| | 37,247,784 |
| | 36,950,000 |
|
Net income (loss) per share, basic and diluted | $ | 0.13 |
| | $ | 0.01 |
| | $ | 0.18 |
| | $ | (0.03 | ) |
Equity instruments excluded from diluted net income (loss) per share calculation as the effect would have been anti-dilutive: | | | | | | | |
Stock options | 699,171 |
| | 571,491 |
| | 483,620 |
| | 567,664 |
|
Restricted stock units | 129,252 |
| | — |
| | 111,435 |
| | 570,601 |
|
15. Other Commitments and Contingencies
The Company is in the health and human services business and, therefore, has been and continues to be subject to numerous claims alleging that the Company, its employees or its independently contracted host-home caregivers (“Mentors”) failed to provide proper care for a client. The Company is also subject to claims by its clients, its employees, its Mentors or community members against the Company for negligence, intentional misconduct or violation of applicable laws. Included in the Company’s recent claims are claims alleging personal injury, assault, abuse, wrongful death and other charges. Regulatory agencies may initiate administrative proceedings alleging that the Company’s programs, employees or agents violate statutes and regulations and seek to impose monetary penalties on the Company. The Company could be required to incur significant costs to respond to regulatory investigations or defend against civil lawsuits and, if the Company does not prevail, the Company could be required to pay substantial amounts of money in damages, settlement amounts or penalties arising from these legal proceedings.
The Company is also subject to potential lawsuits under the False Claims Act and other federal and state whistleblower statutes designed to combat fraud and abuse in the health care industry. These lawsuits can involve significant monetary awards that may incentivize private plaintiffs to bring these suits. If the Company is found to have violated the False Claims Act, it could be excluded from participation in Medicaid and other federal healthcare programs. The Patient Protection and Affordable Care Act provides a mandate for more vigorous and widespread enforcement activity to combat fraud and abuse in the health care industry.
The Company is also subject to employee-related claims under state and federal law, including claims for discrimination, wrongful discharge or retaliation; claims for wage and hour violations under the Fair Labor Standards Act or state wage and hour laws.
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| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion of our financial condition and results of operations should be read in conjunction with our Annual Report on Form 10-K for the fiscal year ended September 30, 2015, as well as our reports on Form 8-K and other publicly available information. This discussion may contain forward-looking statements about our markets, the demand for our services and our future results. We based these statements on assumptions that we consider reasonable. Actual results may differ materially from those suggested by our forward-looking statements for various reasons, including those discussed in the “Risk Factors” and “Forward-Looking Statements” sections of this report.
Overview
We are the leading national provider of home- and community-based health and human services to must-serve individuals with intellectual, developmental, physical or behavioral disabilities and other special needs. Since our founding in 1980, we have been a pioneer in the movement to provide home- and community-based services for people who would otherwise be institutionalized. During our 35-year history, we have evolved from a single residential program serving at-risk youth to a diversified national network providing an array of high-quality services and care in large, growing and highly-fragmented markets. While we have the capabilities to serve individuals with a wide variety of special needs and disabilities, we currently provide our services to individuals with intellectual and/or developmental disabilities ("I/DD"), individuals with catastrophic injuries and illnesses, particularly acquired brain injury ("ABI"), youth with emotional, behavioral and/or medically complex challenges, or at-risk youth ("ARY"), and elders in need of day health services to support their independence, or adult day health (“ADH”). As of June 30, 2016, we operated in 35 states, serving approximately 11,500 clients in residential settings and approximately 16,300 clients in non-residential settings. We have a diverse group of hundreds of public payors which fund our services with a combination of federal, state and local funding, as well as, an increasing number of non-public payors related to our services for ABI and other catastrophic injuries and illnesses.
We have two reportable business segments: the Human Services Segment and the Post-Acute Specialty Rehabilitation Services (“SRS”) Segment. Through the Human Services Segment, we provide home- and community-based human services to adults and children with intellectual and developmental disabilities, to youth with emotional, behavioral and/or medically complex challenges and, beginning in fiscal 2014, to elders. The operations of the Human Services Segment have been organized by management into three operating segments based upon geography and clients served. Through the SRS Segment, we deliver services to individuals who have suffered acquired brain injury, spinal injuries and other catastrophic injuries and illnesses. The operations of the SRS Segment have been organized by management into two operating segments, NeuroRestorative and CareMeridian, based upon service type. Each operating segment is aligned with the Company’s reporting structure and has a segment manager that is directly accountable for its operations and regularly reports results to the chief operating decision maker, which is the Company's Chief Operating Officer, for the purpose of evaluating these results and making decisions regarding resource allocations.
Delivery of services to individuals with I/DD is the largest portion of our Human Services segment. Our I/DD programs include residential support, day habilitation, vocational services, case management, crisis intervention and hourly support care. Our Human Services segment also includes the delivery of ARY services. Our ARY programs include therapeutic foster care, family preservation, adoption services, early intervention, school-based services and juvenile offender programs. Our newest service line, ADH, delivers elder services including case management, nursing oversight, medication management, nutrition, daily living assistance, transportation, and therapeutic services.
Within our SRS segment, our NeuroRestorative operating segment is focused on rehabilitation and transitional living services and our CareMeridian operating segment is focused on the more medically-intensive post-acute care services. Our SRS services range from sub-acute healthcare for individuals with intensive medical needs to day treatment programs, and include: neurorehabilitation; neurobehavioral rehabilitation; specialized nursing; physical, occupational and speech therapies; supported living; outpatient treatment; and pre-vocational services.
Factors Affecting our Operating Results
Demand for Home and Community-Based Health and Human Services
Our growth in revenue has historically been primarily related to increases in the number of individuals served, as well as increases in the rates we receive for our services. This growth has depended largely upon development-driven activities, including the maintenance and expansion of existing contracts and the award of new contracts, our new start program and acquisitions. We also attribute the long-term growth in our client base to certain trends that are increasing demand in our industry, including demographic, health-care and political developments.
Demographic trends have a particular impact on our I/DD business. Increases in the life expectancy of individuals with I/DD, we believe, have resulted in steady increases in the demand for I/DD services. In addition, caregivers currently caring for their relatives at home are aging and many may soon be unable to continue with these responsibilities. Many states continue to downsize or close large, publicly-run facilities for individuals with I/DD and refer those individuals to private providers of community-based services. Each of these factors affects the size of the I/DD population in need of services. Demand for our SRS services has also grown as emergency response and improved medical techniques have resulted in more people surviving a catastrophic injury. SRS services are increasingly sought out as a clinically-appropriate and less-expensive alternative to institutional care and as a “step-down” for individuals who no longer require care in acute settings.
Our residential ARY services were negatively impacted by a substantial decline in the number of children and adolescents in foster care placements during the last decade, although the population has stabilized in recent years. This decline has contributed to increased demand for periodic, non-residential services to support at-risk youth and their families. In connection with a strategic review of our ARY service line in fiscal 2015, we completed the sale of our ARY business in North Carolina in December 2015 and completed the closures of our ARY operations in Florida and Louisiana in December 2015 and in Indiana and Texas in January 2016.
Political and economic trends can also affect our operations. Budgetary pressures facing state governments, especially within Medicaid programs, as well as other economic, industry and political factors could cause state governments to limit spending, which could significantly reduce our revenue, referrals, margins and profitability, and adversely affect our growth strategy. Government agencies generally condition their contracts with us upon a sufficient budgetary appropriation. If the government agency does not receive an appropriation sufficient to cover its obligations with us, it may terminate a contract or defer or reduce our reimbursements. For example, during the economic downturn that began in 2008, our government payors in several states responded to deteriorating revenue collections by implementing service reductions, rate freezes and/or rate reductions. Beginning in fiscal 2012, the rate environment improved and, as a result, pricing increases contributed to revenue growth during each of the fiscal years from 2012 through 2015. While this trend is continuing in fiscal 2016 as the rate climate remains stable to favorable in all but one of our key markets, the financial impact is expected to be significantly more modest than in prior years due to a redesign of the I/DD Waiver program in West Virginia. Through June 30, 2016, this redesign has been the primary driver of an $8.8 million and $4.3 million reduction to our West Virginia revenue and income from operations, respectively, as compared to the comparable period a year ago. We anticipate that this operation will experience continued reduction in revenue and income from operations in the fourth quarter, estimated to be in a range of $3.0 to $3.5 million and $1.5 to $2.5 million dollars, respectively.
Historically, our business has benefited from the trend toward privatization and the efforts of groups that advocate for the populations we serve. These groups lobby governments to fund residential services that use our small group home or host home models, rather than large, institutional models. Furthermore, we believe that successful lobbying by advocacy groups has preserved I/DD and ARY services and, therefore, our revenue base for these services, from significant reductions as compared with certain other human services, although we did suffer rate reductions during and after the recession that began in 2008. In addition, a number of states have developed community-based waiver programs to support long-term care services for survivors of a traumatic brain injury. However, the majority of our specialty rehabilitation services revenue is derived from non-public payors, such as commercial insurers, managed care and other private payors.
Expansion of Services
We have grown our business through expansion of existing markets and programs, entry into new geographical markets, as well as through acquisitions.
Organic Growth
Various economic, fiscal, public policy and legal factors are contributing to an environment with an increased number of organic growth opportunities, particularly within the Human Services segment, and, as a result, we have a continued emphasis on growing our business organically and making investments to support the effort. Our future growth will depend heavily on our ability to expand our current programs and identify and execute upon new opportunities. Our organic expansion activities consist of both new program starts in existing markets and expansion into new geographical markets. Our new programs in new and existing geographic markets typically require us to incur and fund operating losses for a period of approximately 18 to 24 months (we refer to these new programs as “new starts”). Net operating loss or income of a new start is defined as its revenue for the period less direct expenses but not including allocated overhead costs. The aggregation of all programs with net operating losses that are less than 18 months old comprises the new start operating loss and the aggregation of all programs with net operating income that are less than 18 months old comprises the new start operating income for such period. During the three months ended June 30, 2016 and 2015, new starts generated operating losses of $2.2 million and $1.4 million, respectively, and operating income of $1.1 million and $0.7 million, respectively. During the nine months ended June 30, 2016 and 2015, new starts generated operating losses of $5.4 million and $3.9 million, respectively, and operating income of $2.8 million and $2.0 million, respectively.
Acquisitions
From the beginning of fiscal 2010 through June 30, 2016, we have completed 56 acquisitions, including several acquisitions of small providers, which we have integrated with our existing operations. We have pursued larger strategic acquisitions in the past and may opportunistically do so in the future. Acquisitions could have a material impact on our consolidated financial statements.
During the nine months ended June 30, 2016, we acquired the assets of ten companies complementary to our business for total cash consideration of $44.5 million.
During the nine months ended June 30, 2015, we acquired the assets of ten companies complementary to our business for total fair value consideration of $44.8 million, including $6.1 million of contingent consideration.
Divestitures
We regularly review and consider the divestiture of underperforming or non-strategic businesses to improve our operating results and better utilize our capital. We have made divestitures from time to time and expect that we may make additional divestitures in the future. Divestitures could have a material impact on our consolidated financial statements.
During fiscal 2015, the Company decided to discontinue ARY services in the states of Florida, Louisiana, Indiana, North Carolina and Texas. As a result, we sold our ARY operations in North Carolina on December 1, 2015 and closed our ARY operations in Florida, Louisiana, Indiana and Texas during the first two quarters of fiscal 2016. In connection with these divestitures, we recorded exit costs of $2.0 million, consisting of severance costs of $0.5 million and lease termination costs of $1.5 million, and a loss on the sale of our ARY business in North Carolina of $1.3 million during the first half of fiscal 2016.
Revenue
Revenue is reported net of allowances for unauthorized sales and estimated sales adjustments, and net of any state provider taxes or gross receipts taxes levied on services we provide. We derive revenue from contracts with state, local and other government payors and non-public payors. During both the three and nine months ended June 30, 2016, we derived 88% of our net revenue from contracts with state, local and other government payors and 12% of our net revenue from non-public payors, as compared to 89% of our net revenue from contracts with state, local and other government payors and 11% of our net revenue from non-public payors during both the three and nine months ended June 30, 2015. Substantially all of our non-public revenue is generated by our SRS business through contracts with commercial insurers, workers’ compensation carriers and other private payors. The payment terms and rates of our contracts vary widely by jurisdiction and service type. We have four types of contractual arrangements with payors which include negotiated contracts, fixed fee contracts, retrospective reimbursement contracts and prospective payments contracts. Our revenue may be affected by adjustments to our billed rates as well as adjustments to previously billed amounts. Revenue in the future may be affected by changes in rates, rate-setting structures, methodologies or interpretations that may be proposed in states where we operate or by the federal government which provides matching funds. We cannot determine the impact of such changes or the effect of any possible governmental actions. In general, we take prices set by our payors and do not compete based on pricing.
We bill the majority of our residential services on a per person per-diem basis. We believe important performance measures of revenues in our residential service business include average daily residential census and average daily billing rates. We bill the majority of our non-residential service on a per service unit basis. These service units, which vary in length, are converted to billable units which are the hourly equivalent for the service provided. We believe important performance measures of revenues in our non-residential service business include billable units and average billable unit rates. We calculate the impact of these factors on gross revenue rather than net revenue because the timing of sales adjustments, both positive and negative, is unpredictable. We define these measures and gross revenue as follows:
| |
• | Gross Revenue: Revenues before adjusting for sales adjustments and state provider and gross receipts taxes. |
| |
• | Average Residential Census: The average daily residential census over the respective period. |
| |
• | Average Daily Rate: A mathematical calculation derived by dividing the gross residential revenue by the residential census and the resulting quotient by the number of days during the respective period. |
| |
• | Non-Residential Billable Units: The hourly equivalent of non-residential services provided. |
| |
• | Average Billable Unit Rate: Gross non-residential revenue divided by the billable units provided during the period. |
A comparative summary of gross revenues by service line and our key metrics is as follows (dollars in thousands, except for daily and billable unit rates):
|
| | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
2016 | | 2015 | | 2016 | | 2015 |
I/DD Services | | | | | | | |
Gross Revenues | $ | 237,718 |
| | $ | 227,942 |
| | $ | 704,254 |
| | $ | 668,883 |
|
Average Residential Census | 8,103 |
| | 7,926 |
| | 8,047 |
| | 7,818 |
|
Average Daily Rate | $ | 244.10 |
| | $ | 234.96 |
| | $ | 240.44 |
| | $ | 233.64 |
|
Non-Residential Billable Units | 3,200,631 |
| | 3,210,055 |
| | 9,502,337 |
| | 9,342,956 |
|
Average Non-Residential Billable Unit Rate | $ | 18.04 |
| | $ | 18.22 |
| | $ | 18.33 |
| | $ | 18.22 |
|
Gross Revenue Growth % | 4.3 | % | | | | 5.3 | % | | |
Gross Revenue growth due to: | | | | | | | |
Volume Growth | 1.6 | % | | | | 2.6 | % | | |
Average Rate Growth | 2.7 | % | | | | 2.7 | % | | |
At-Risk Youth Services | | | | | | | |
Gross Revenues | $ | 35,767 |
| | $ | 49,381 |
| | $ | 114,055 |
| | $ | 147,772 |
|
Average Residential Census | 2,139 |
| | 3,434 |
| | 2,382 |
| | 3,594 |
|
Average Daily Rate | $ | 127.89 |
| | $ | 111.33 |
| | $ | 124.22 |
| | $ | 106.81 |
|
Non-residential Billable Units | 135,314 |
| | 171,810 |
| | 411,118 |
| | 506,970 |
|
Average Non-Residential Billable Unit Rate | $ | 80.34 |
| | $ | 84.92 |
| | $ | 80.21 |
| | $ | 84.78 |
|
Gross Revenue Growth % | (27.6 | )% | | | | (22.8 | )% | | |
Gross Revenue growth due to: | | | | | | | |
Volume Growth | (32.9 | )% | | | | (29.4 | )% | | |
Average Rate Growth | 5.3 | % | | | | 6.6 | % | | |
Adult Day Health | | | | | | | |
Gross Revenues | $ | 11,399 |
| | $ | 5,076 |
| | $ | 24,425 |
| | $ | 13,998 |
|
Non-residential Billable Units | 680,536 |
| | 333,312 |
| | 1,523,440 |
| | 920,052 |
|
Average Non-Residential Billable Unit Rate | $ | 16.75 |
| | $ | 15.23 |
| | $ | 16.03 |
| | $ | 15.21 |
|
Gross Revenue Growth % | 124.6 | % | | | | 74.5 | % | | |
Gross Revenue growth due to: | | | | | | | |
Volume Growth | 104.2 | % | | | | 65.6 | % | | |
Average Rate Growth | 20.4 | % | | | | 8.9 | % | | |
Specialty Rehabilitation Services | | | | | | | |
Gross Revenues | $ | 73,688 |
| | $ | 68,663 |
| | $ | 214,660 |
| | $ | 197,845 |
|
Average Residential Census | 1,271 |
| | 1,193 |
| | 1,247 |
| | 1,166 |
|
Average Daily Rate | $ | 610.06 |
| | $ | 611.78 |
| | $ | 604.12 |
| | $ | 608.74 |
|
Non-residential Billable Units | 41,342 |
| | 35,734 |
| | 116,899 |
| | 66,779 |
|
Average Non-Residential Billable Unit Rate | $ | 75.78 |
| | $ | 63.52 |
| | $ | 70.86 |
| | $ | 62.17 |
|
Gross Revenue Growth % | 7.3 | % | | | | 8.5 | % | | |
Gross Revenue growth due to: | | | | | | | |
Volume Growth | 6.9 | % | | | | 8.4 | % | | |
Average Rate Growth | 0.4 | % | | | | 0.1 | % | | |
Expenses
Expenses directly related to providing services are classified as cost of revenue. These expenses consist of direct labor costs which principally include salaries and benefits for service provider employees and per diem payments to our Mentors; client program costs such as food, medicine and professional and general liability and employment practices liability expenses; residential occupancy expenses which are primarily comprised of rent and utilities related to facilities providing direct care; travel and transportation costs for clients requiring services; and other ancillary direct costs associated with the provision of services to clients including workers’ compensation expense.
Wages and benefits to our employees and per diem payments to our Mentors constitute the most significant operating cost in each of our operations. Most of our employee caregivers are paid on an hourly basis, with hours of work generally tied to client need. Our Mentors are paid on a per diem basis, but only if the Mentor is currently caring for a client. Our labor costs are generally influenced by levels of service, and these costs can vary in material respects across regions. In addition, our labor costs are expected to rise as a result of recent regulatory actions at both the state and Federal levels. For example, the Department of Labor recently adopted a final rule effective December 1, 2016 setting an adjusted base minimum salary of $47,476 ($913 per week) required to classify an employee as exempt from overtime eligibility. Automatic adjustments are expected every three years beginning in January, 2020. Given the increase in the minimum salary, we expect to incur significant additional labor costs in the form of overtime pay for previously exempt employees, increased salaries and additional hires to minimize overtime exposure. Compliance with the final rule is expected to impact our results in the first quarter of fiscal 2017 and thereafter. The potential annual costs that could be incurred as a result of the final rule are difficult to quantify and predict but are currently estimated to be in a range of $7.0 million to $9.0 million per year and will negatively affect our margin. We are actively working on mitigation strategies and strategies to engage with our payors to reduce this impact but there can be no assurance that we will be able to do so.
Occupancy costs represent a significant portion of our operating costs. As of June 30, 2016, we owned 364 facilities and three offices, and we leased 1,621 facilities and 219 offices. We expect occupancy costs to increase during fiscal 2016 as a result of new leases entered into in connection with acquisitions and new starts. We incur no facility costs for services provided in the home of a Mentor.
Professional and general liability expense totaled 0.7% and 0.9% of gross revenue for the three and nine months ended June 30, 2016, respectively, as compared to 0.8% and 0.7% for the three and nine months ended June 30, 2015, respectively. We incurred professional and general liability expenses of $2.6 million and $9.2 million during the three and nine months ended June 30, 2016, respectively, and $2.8 million and $7.7 million during the three and nine months ended June 30, 2015, respectively. These expenses are incurred in connection with our claims reserve and insurance premiums. The increase in expense during the nine months ended June 30, 2016, as compared to the same periods of the prior year, was due to unfavorable claims experience.
General and administrative expenses primarily include salaries and benefits for administrative employees, or employees that are not directly providing services, administrative occupancy costs as well as professional expenses such as accounting, consulting and legal services, and stock-based compensation expense. Depreciation and amortization includes depreciation for fixed assets utilized in both facilities providing direct care and administrative offices, and amortization related to intangible assets.
Results of Operations
The following table sets forth our consolidated results of operations as a percentage of total gross revenues for the periods indicated. |
| | | | | | | | | | | |
| Three Months Ended June 30, | | Nine Months Ended June 30, |
2016 |
| 2015 | | 2016 | | 2015 |
Gross revenue | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Sales adjustments | (1.3 | )% | | (1.4 | )% | | (1.1 | )% | | (1.2 | )% |
Net revenue | 98.7 | % |
| 98.6 | % | | 98.9 | % | | 98.8 | % |
Cost of revenue | 76.6 | % |
| 76.5 | % | | 76.7 | % | | 76.4 | % |
Operating expenses: | | | | | | | |
General and administrative | 12.0 | % |
| 11.3 | % | | 12.5 | % | | 11.6 | % |
Depreciation and amortization | 5.2 | % |
| 7.5 | % | | 5.2 | % | | 6.2 | % |
Total operating expense | 17.2 | % |
| 18.8 | % | | 17.7 | % | | 17.8 | % |
Income from operations | 5.0 | % |
| 3.3 | % | | 4.4 | % | | 4.6 | % |
Other income (expense): | | | | | | | |
Management fee of related party | — | % |
| — | % | | — | % | | — | % |
Other expense, net | — | % |
| (0.1 | )% | | (0.1 | )% | | — | % |
Extinguishment of debt | — | % |
| — | % | | — | % | | (1.7 | )% |
Interest expense | (2.4 | )% |
| (2.4 | )% | | (2.4 | )% | | (2.9 | )% |
Income (loss) from continuing operations before income taxes | 2.6 | % |
| 0.8 | % | | 1.9 | % | | — | % |
Provision (benefit) for income taxes | 1.2 | % |
| 0.3 | % | | 1.2 | % | | — | % |
Income (loss) from continuing operations | 1.4 | % |
| 0.5 | % | | 0.7 | % | | — | % |
Loss from discontinued operations, net of tax | — | % |
| (0.2 | )% | | — | % | | (0.1 | )% |
Net income (loss) | 1.4 | % |
| 0.3 | % | | 0.7 | % | | (0.1 | )% |
Three Months Ended June 30, 2016 and 2015
Consolidated Overview |
| | | | | | | | | | | |
| Three Months Ended June 30, |
|
Increase (Decrease) |
(in thousands) | 2016 |
| 2015 |
|
Gross revenue | $ | 358,572 |
|
| $ | 351,062 |
|
| $ | 7,510 |
|
Sales adjustments | (4,609 | ) |
| (5,068 | ) |
| 459 |
|
Net revenue | 353,963 |
|
| 345,994 |
|
| 7,969 |
|
Income from operations | $ | 17,772 |
|
| $ | 11,515 |
|
| $ | 6,257 |
|
Operating margin | 5.0 | % |
| 3.3 | % |
| 1.7 | % |
Consolidated gross revenue for the three months ended June 30, 2016 increased by $7.5 million, or 2.1%, compared to gross revenue for the three months ended June 30, 2015. Sales adjustments as a percentage of gross revenue decreased by 0.1% from 1.4% during three months ended June 30, 2015 to 1.3% during three months ended June 30, 2016. The growth in gross revenue was negatively impacted by the divestitures or our ARY operations in Illinois in the third quarter of fiscal 2015, and in Florida, Louisiana, Indiana, North Carolina and Texas during the first half of fiscal 2016 ("ARY Divestitures"), which resulted in a decrease of $13.8 million in gross revenue. Excluding these operations, gross revenue increased by $21.3 million, or 6.3%, of which $12.5 million was from acquisitions that closed during and after the third quarter ending June 30, 2015 and $8.9 million from organic growth.
Consolidated income from operations was $17.8 million for three months ended June 30, 2016 compared to $11.5 million for the three months ended June 30, 2015. Income from operations increased from 3.3% of gross revenue during the three months ended June 30, 2015 to 5.0% of gross revenue during the three months ended June 30, 2016. The increase in our operating margin as a percentage of gross revenue was primarily due to the positive impact of divesting our lower margin ARY operations, and a decrease in depreciation and amortization expense. Depreciation and amortization expense for the three months ended June 30, 2015 included an intangible asset impairment charge of $8.2 million related to the ARY Divestitures.
Revenues by segment
The following table sets forth revenue for the Human Services segment for the periods indicated (in thousands): |
| | | | | | | | | | | | | | |
| Three Months Ended June 30, | |
Increase (Decrease) | | Percentage Increase (Decrease) |
| 2016 | | 2015 | | |
I/DD gross revenue | $ | 237,718 |
| | $ | 227,942 |
| | $ | 9,776 |
| | 4.3 | % |
ARY gross revenue | 35,767 |
| | 49,381 |
| | (13,614 | ) | | (27.6 | )% |
ADH gross revenue | 11,399 |
| | 5,076 |
| | 6,323 |
| | 124.6 | % |
Total Human Services gross revenue | 284,884 |
| | 282,399 |
| | 2,485 |
| | 0.9 | % |
Sales adjustments | (4,427 | ) | | (4,001 | ) | | | | |
Sales adjustments as a percentage of gross revenue | (1.6 | )% | | (1.4 | )% | | | | |
Total Human Services net revenue | $ | 280,457 |
| | $ | 278,398 |
| | $ | 2,059 |
| | 0.7 | % |
Human Services gross revenue for the three months ended June 30, 2016 increased by $2.5 million, or 0.9%, compared to the three months ended June 30, 2015. The increase in gross revenue was driven by a $9.8 million increase in I/DD gross revenue while ARY gross revenue decreased by $13.6 million compared to the three months ended June 30, 2015. Gross revenue for ADH increased $6.3 million during the three months ended June 30, 2016 to $11.4 million.
The increase in I/DD gross revenue included $4.5 million from organic growth and $5.3 million from acquisitions that closed during and after the three months ended June 30, 2015. The organic growth was the result of a 2.0% increase in average billing rates compared to the three months ended June 30, 2015.
The $13.6 million decrease in ARY gross revenue was driven by a 32.9% decrease in volume due to the ARY Divestitures. These divestitures resulted in a decrease of $13.8 million in gross revenue, which was partially offset by an increase in revenue in the remaining ARY states.
The increase in ADH gross revenue included $1.0 million from organic growth and $5.4 million from acquisitions that closed after the three months ended June 30, 2015. The organic growth was the result of a 17.5% increase in volume and a 1.5% increase in the average billing rate compared to the three months ended June 30, 2015. The increase in volume was driven by new starts.
Sales adjustments for the three months ended June 30, 2016 increased by $0.4 million, or 0.2% as a percentage of gross revenue, compared to the three months ended June 30, 2015.
The following table sets forth revenue for the SRS segment for the periods indicated (in thousands): |
| | | | | | | | | | | | | | |
| Three Months Ended June 30, | |
Increase (Decrease) | | Percentage Increase (Decrease) |
| 2016 | | 2015 | | |
SRS gross revenue | $ | 73,688 |
| | $ | 68,663 |
| | $ | 5,025 |
| | 7.3 | % |
Sales adjustments | (182 | ) | | (1,067 | ) | | | | |
Sales adjustments as a percentage of gross revenue | (0.2 | )% | | (1.6 | )% | | | | |
SRS net revenue | $ | 73,506 |
| | $ | 67,596 |
| | $ | 5,910 |
| | 8.7 | % |
The SRS segment’s gross revenue for the three months ended June 30, 2016 increased by $5.0 million, or 7.3%, compared to the three months ended June 30, 2015. The increase included $3.2 million from organic growth and $1.8 million from acquisitions that closed during and after the three months ended June 30, 2015. The organic growth was driven by an increase in volume of 5.7% partially offset by a decrease in the average billing rate of 0.7% as a result of changes in our consumer mix. The increase in volume was primarily driven by lower levels of open occupancy resulting from the maturation of programs started in recent years.
Sales adjustments for the three months ended June 30, 2016 decreased from $1.1 million for the three months ended June 30, 2015 to $0.2 million.
Cost of revenues by segment
The following table sets forth cost of revenues for the Human Services segment for the periods indicated (in thousands): |
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | |
| 2016 | | 2015 | | | | Change in % of gross revenue |
| Amount | | % of gross revenue | | Amount | | % of gross revenue | | Increase (Decrease) | |
Direct labor costs | $ | 178,626 |
| | 62.7 | % | | $ | 179,443 |
| | 63.5 | % | | $ | (817 | ) | | (0.8 | )% |
Client program costs | 11,657 |
| | 4.1 | % | | 11,135 |
| | 3.9 | % | | 522 |
| | 0.2 | % |
Client occupancy costs | 18,205 |
| | 6.4 | % | | 16,193 |
| | 5.7 | % | | 2,012 |
| | 0.7 | % |
Travel & transportation costs | 7,141 |
| | 2.5 | % | | 7,412 |
| | 2.6 | % | | (271 | ) | | (0.1 | )% |
Other direct costs | 6,267 |
| | |