|
|
|
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, 2016
, 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 a range of intellectual, developmental, behavioral and/or medically complex disabilities and challenges. 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 more than 36-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
December 31, 2016
, we operated in
35
states, serving approximately
11,600
clients in residential settings and more than
16,500
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 previously operated our business in two reportable segments, Human Services and Post-Acute Specialty Rehabilitation Services ("SRS"). As a result of recent changes in our organizational structure which took effect on October 1, 2016, we have changed our reportable segments. Beginning with the first quarter of fiscal 2017, our Human Services segment was divided into two reportable segments: the Intellectual and Developmental Disabilities (“I/DD”) segment and the At-Risk Youth (“ARY”) segment. This change aligns with the way we have begun to operate our business commencing in the first quarter of fiscal 2017. The Adult Day Health (“ADH”) operating segment, which was previously aggregated in the Human Services segment, is included in Corporate and Other. There has been no change to the Post-Acute Specialty Rehabilitation Services (“SRS”) Segment.
As described above we now have three reportable segments: the I/DD segment, the SRS segment, and the ARY segment.
Our I/DD segment is the largest portion of our business. Through the I/DD segment, we provide home- and community-based human services to adults and children with intellectual and developmental disabilities. Our I/DD programs include residential support, day habilitation, vocational services, case management, crisis intervention and hourly support care.
Through the SRS segment, which is our second largest segment, we deliver services to individuals who have suffered acquired brain injury, spinal injuries and other catastrophic injuries and illnesses. Within our SRS segment, our NeuroRestorative operating segment is focused on providing behavioral therapies to brain injured clients in post-acute community settings and our CareMeridian operating segment is focused on providing 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.
Through the ARY segment we provide home- and community-based human services to youth with emotional, behavioral and/or medically complex challenges. Our ARY programs include therapeutic foster care, family preservation, adoption services, early intervention, school-based services and juvenile offender programs.
Our newest operating segment, ADH, delivers elder services including case management, nursing oversight, medication management, nutrition, daily living assistance, therapeutic services and transportation. The results of our ADH operating segment are included within Corporate and Other.
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. The decline 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 decided to discontinue ARY services in the states of Florida, Louisiana, Indiana, North Carolina and Texas. 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 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. In the past, certain states in which we operate, including Minnesota, California, Florida, Indiana and Arizona implemented rate reductions, rate freezes and service reductions, in response to state budgetary deficits. In 2017, we expect the overall rate environment to remain stable. Beginning in 2015, West Virginia implemented a redesign of its I/DD Waiver Program. This redesign has resulted in a reduction in our West Virginia revenue and income from operations of $2.9 million and $0.7 million, respectively, during the three months ended December 31, 2016 as compared the three months ended December 31, 2015. As a result of the redesign, five individual consumers under the I/DD Waiver Program commenced litigation against the Secretary of the State’s Health and Human Resources Department in response to the State’s reduction in their service authorization levels. On September 13, 2016, the District Court for the Southern District of West Virginia issued a preliminary injunction for the five named plaintiffs, endeavoring to restore their service authorization levels to the level that pre-dated the redesign. On September 30, 2016, the Court certified the class of all the I/DD waiver participants in the State and a motion to expand the protections of the preliminary injunction is pending before the Court. The ultimate outcome of the litigation is unclear, but absent a change in policy we anticipate that our West Virginia operation will experience a reduction in revenue and income from operations, estimated to be in the range of $4.0 to $6.0 million and $2.0 to $4.0 million, respectively, in fiscal 2017 as a result of the annualization of the reductions implemented during fiscal 2016. In the event the preliminary injunction is expanded or a settlement is reached, it could result in an increase in authorization levels.
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 in the past certain states have imposed rate reductions, rate freezes, and service reductions in response to state budgetary pressures. 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 a number of organic growth opportunities, particularly within the I/DD 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 December 31, 2016
and
2015
, new starts generated operating losses of
$2.1 million
and
$1.9 million
, respectively, and operating income of
$1.6 million
and
$0.7 million
, respectively.
Acquisitions
From the beginning of fiscal 2011 through
December 31, 2016
, we have completed
50
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
three months ended December 31, 2016
, we did not complete any acquisitions. During the
three
months ended
December 31, 2015
, we acquired the assets of two companies complementary to our business for total cash consideration of
$4.2 million
.
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. In connection with these divestitures we recorded impairment charges for intangible assets of $10.4 million in fiscal 2015, exit costs of $2.1 and a loss on sale of $1.3 million during the three months ended December 31, 2015. It was determined that this disposal group did not meet the criteria to be presented as discontinued operations, as a result, the operating results are included within continuing operating results in the Consolidated Statement of Operations.
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 the three months ended
December 31, 2016
and 2015, we derived
89%
of our net revenue from contracts with state, local and other government payors and
11%
of our net revenue from non-public payors. 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 December 31,
|
2016
|
|
2015
|
I/DD Services
|
|
|
|
Gross Revenues
|
$
|
241,197
|
|
|
$
|
232,068
|
|
Average Residential Census
|
8,158
|
|
|
8,021
|
|
Average Daily Rate
|
$
|
244.54
|
|
|
$
|
235.63
|
|
Non-Residential Billable Units
|
3,120,076
|
|
|
3,163,464
|
|
Average Non-Residential Billable Unit Rate
|
$
|
18.48
|
|
|
$
|
18.40
|
|
Gross Revenue Growth %
|
3.9
|
%
|
|
|
Gross Revenue growth due to:
|
|
|
|
Volume Growth
|
0.9
|
%
|
|
|
Average Rate Growth
|
3.0
|
%
|
|
|
Specialty Rehabilitation Services
|
|
|
|
Gross Revenues
|
$
|
75,930
|
|
|
$
|
69,186
|
|
Average Residential Census
|
1,288
|
|
|
1,217
|
|
Average Daily Rate
|
$
|
615.41
|
|
|
$
|
597.60
|
|
Non-residential Billable Units
|
39,709
|
|
|
35,759
|
|
Average Non-Residential Billable Unit Rate
|
$
|
76.07
|
|
|
$
|
64.24
|
|
Gross Revenue Growth %
|
9.7
|
%
|
|
|
Gross Revenue growth due to:
|
|
|
|
Volume Growth
|
6.0
|
%
|
|
|
Average Rate Growth
|
3.7
|
%
|
|
|
At-Risk Youth Services
|
|
|
|
Gross Revenues
(1)
|
$
|
35,965
|
|
|
$
|
42,911
|
|
Average Residential Census
|
2,133
|
|
|
2,855
|
|
Average Daily Rate
|
$
|
128.07
|
|
|
$
|
117.52
|
|
Non-residential Billable Units
|
132,865
|
|
|
149,724
|
|
Average Non-Residential Billable Unit Rate
|
$
|
81.50
|
|
|
$
|
80.43
|
|
Gross Revenue Growth %
|
(16.2
|
)%
|
|
|
Gross Revenue growth due to:
|
|
|
|
Volume Growth
|
(21.4
|
)%
|
|
|
Average Rate Growth
|
5.2
|
%
|
|
|
Adult Day Health
|
|
|
|
Gross Revenues
|
$
|
11,348
|
|
|
$
|
5,571
|
|
Non-residential Billable Units
|
664,954
|
|
|
362,730
|
|
Average Non-Residential Billable Unit Rate
|
$
|
17.07
|
|
|
$
|
15.36
|
|
Gross Revenue Growth %
|
103.7
|
%
|
|
|
Gross Revenue growth due to:
|
|
|
|
Volume Growth
|
83.3
|
%
|
|
|
Average Rate Growth
|
20.4
|
%
|
|
|
(1)
Includes $7.2 million of revenue for the three months ended December 31, 2015 from the operations that were divested during the first half of 2016. There was no ARY revenue related to these divested operations during the three months ended December 31, 2016.
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 composed 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, in May 2016, the Federal Department of Labor raised the current base salary minimum to be exempt from overtime pay for all hours worked over 40 hours in a designated work-week from $23,660 ($455 per week) to $47,476 ($913/week) to be effective December 1, 2016, with adjustments thereafter every three years based on a standard metric, with the first adjustment to be no earlier than January 2020 (the “FLSA Final Rule”). On November 22, 2016, the U.S. Federal District Court for the Eastern District of Texas granted a nationwide preliminary injunction enjoining the implementation and enforcement of the FLSA Final Rule. As a result of the injunction, we have delayed the complete implementation of our plan to comply with the FLSA Final Rule, pending the outcome of the injunction and the treatment of the FLSA Final Rule by the new Administration. However, we did implement, during the second quarter of fiscal 2017 some changes that were too far along in implementation prior to the issuance of the injunction. The potential cost in fiscal 2017 associated with these changes is estimated to be approximately $2.7 million. In the event that the injunction is not made permanent and/or the FLSA Final Rule is ultimately determined to be valid and enforceable, we believe we will be prepared to implement the FLSA Final Rule within a reasonable time frame, resulting in significant additional labor costs in the form of overtime pay for previously exempt employees, increased salaries and additional hires to minimize overtime exposure. The potential annual costs that may be incurred as a result of our compliance with the FLSA Final Rule are difficult to quantify and predict but were previously estimated to be in a range of $7.0 million to $9.0 million annually, including the approximately $2.7 million of expected cost for the changes implemented during the second quarter of fiscal 2017. We will continue to monitor the rulings and the position of the new Administration and work to develop and execute on strategies to mitigate and reduce the impact of the FLSA Final Rule should the injunction be lifted or the matter be otherwise resolved, 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
December 31, 2016
, we owned
361
facilities and
three
offices, and we leased
1,678
facilities and
211
offices. We expect occupancy costs to increase during fiscal 2017 as a result of new leases entered into pursuant to acquisitions and new starts. We incur no facility costs for services provided in the home of a Mentor.
Professional and general liability expense totaled
0.8%
of gross revenue for the
three
months ended
December 31, 2016
and 2015. We incurred professional and general liability expenses of
$3.0 million
during the three months ended
December 31, 2016
and
$2.8 million
during the three months ended
December 31, 2015
. These expenses are incurred in connection with our claims reserve and insurance premiums. We currently are the subject of two complaints pending in California state court, both alleging wage and hour violations and seeking to be designated class-actions. These actions will likely increase our expenses, as we are not insured for employment-practices liability related claims. In the past, increased costs of insurance and claims have negatively impacted our results of operations which resulted in a renewed emphasis on reducing the occurrence of claims.
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.
We have recently begun a comprehensive review of our operations in an effort to identify and eliminate inefficiencies, reduce overtime expenses, and implement cost saving measures throughout the Company. This expense reduction project includes a multi-pronged review of total company-wide expenses, inclusive of labor management and organizational structure. We have engaged outside consultants to assist us with this project and provide recommendations to us regarding ways to optimize our business operations and realize savings. We incurred $1.4 million in consulting and severance costs in the three months ended December 31, 2016 related to this project and expect to
incur additional costs related to this project but at this juncture the future costs are not estimable. The cost savings associated with this project are expected to be approximately $2.0 million in fiscal year 2017 and by the end of fiscal year 2018 we anticipate annual cost savings of more than $4.0 million.
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 December 31,
|
2016
|
|
2015
|
Gross revenue
|
100.0
|
%
|
|
100.0
|
%
|
Sales adjustments
|
(1.4
|
)%
|
|
(1.1
|
)%
|
Net revenue
|
98.6
|
%
|
|
98.9
|
%
|
Cost of revenue
|
77.9
|
%
|
|
77.5
|
%
|
Operating expenses:
|
|
|
|
General and administrative
|
11.5
|
%
|
|
14.2
|
%
|
Depreciation and amortization
|
5.0
|
%
|
|
5.1
|
%
|
Total operating expense
|
16.5
|
%
|
|
19.3
|
%
|
Income from operations
|
4.2
|
%
|
|
2.1
|
%
|
Other income (expense):
|
|
|
|
Other expense, net
|
—
|
%
|
|
(0.2
|
)%
|
Interest expense
|
(2.3
|
)%
|
|
(2.5
|
)%
|
Income (loss) from continuing operations before income taxes
|
1.9
|
%
|
|
(0.6
|
)%
|
Provision for income taxes
|
0.8
|
%
|
|
1.0
|
%
|
Income (loss) from continuing operations
|
1.1
|
%
|
|
(1.6
|
)%
|
Loss from discontinued operations, net of tax
|
—
|
%
|
|
—
|
%
|
Net income (loss)
|
1.1
|
%
|
|
(1.6
|
)%
|
Three Months Ended December 31, 2016
and
2015
Consolidated Overview
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
Increase
|
(in thousands)
|
2016
|
|
2015
|
|
(Decrease)
|
Gross Revenue
|
$
|
364,441
|
|
|
$
|
349,736
|
|
|
$
|
14,705
|
|
Sales Adjustments
|
(5,047
|
)
|
|
(3,989
|
)
|
|
(1,058
|
)
|
Net Revenue
|
$
|
359,394
|
|
|
$
|
345,747
|
|
|
$
|
13,647
|
|
Income from Operations
|
15,471
|
|
|
7,206
|
|
|
8,265
|
|
Operating Margin
|
4.3
|
%
|
|
2.1
|
%
|
|
|
Consolidated gross revenue for the three months ended
December 31, 2016
increased by
$14.7 million
, or 4.2%, compared to gross revenue for three months ended
December 31, 2015
. Sales adjustments as a percentage of gross revenue increased by 0.3% from 1.1% during the three months ended December 31, 2015 to 1.4% during the three months ended December 31, 2016. The growth in gross revenue was negatively impacted by the ARY divestitures during the first half of the prior year, which resulted in a decrease of $6.9 million in gross revenue. Excluding these operations, gross revenue increased by $21.9 million, or 6.4%, of which $11.7 million was from acquisitions that closed during and after the first quarter of fiscal 2015 and $10.2 million was from organic growth.
Consolidated income from operations was $15.5 million for the three months ended December 31, 2016 compared to $7.2 million for the three months ended December 31, 2015. The increase in income from operations was primarily due to a decrease in general and administrative expenses compared to the first quarter of fiscal 2016. The
decrease was the result of cost containment efforts and a $9.6 million reduction in stock based compensation due to a $10.5 stock based compensation charge recorded during the first quarter of the prior year related to awards under our former equity plan.
I/DD Results of Operations
The following table sets forth the results of operations for the I/DD segment for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
|
|
|
2016
|
|
2015
|
|
|
|
Change in %
of gross
revenue
|
|
Amount
|
|
% of gross
revenue
|
|
Amount
|
|
% of gross
revenue
|
|
Increase
(Decrease)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
I/DD gross revenue
|
241,197
|
|
|
100.0
|
%
|
|
232,068
|
|
|
100.0
|
%
|
|
9,129
|
|
|
|
Sales adjustments
|
(2,949
|
)
|
|
(1.2
|
)%
|
|
(2,125
|
)
|
|
(0.9
|
)%
|
|
(824
|
)
|
|
(0.3
|
)%
|
I/DD net revenue
|
238,248
|
|
|
98.8
|
%
|
|
229,943
|
|
|
99.1
|
%
|
|
8,305
|
|
|
(0.3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
Direct labor costs
|
154,810
|
|
|
64.2
|
%
|
|
148,162
|
|
|
63.8
|
%
|
|
6,648
|
|
|
0.4
|
%
|
Client program costs
|
9,976
|
|
|
4.1
|
%
|
|
9,802
|
|
|
4.2
|
%
|
|
174
|
|
|
(0.1
|
)%
|
Client occupancy costs
|
16,366
|
|
|
6.8
|
%
|
|
14,853
|
|
|
6.4
|
%
|
|
1,513
|
|
|
0.4
|
%
|
Other direct costs
|
11,120
|
|
|
4.6
|
%
|
|
10,962
|
|
|
4.7
|
%
|
|
158
|
|
|
(0.1
|
)%
|
Total cost of revenues
|
192,272
|
|
|
79.7
|
%
|
|
183,779
|
|
|
79.1
|
%
|
|
8,493
|
|
|
0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
12,634
|
|
|
5.2
|
%
|
|
13,268
|
|
|
5.7
|
%
|
|
(634
|
)
|
|
(0.5
|
)%
|
Depreciation and amortization
|
9,146
|
|
|
3.8
|
%
|
|
9,420
|
|
|
4.1
|
%
|
|
(274
|
)
|
|
(0.3
|
)%
|
Total operating expenses
|
21,780
|
|
|
9.0
|
%
|
|
22,688
|
|
|
9.8
|
%
|
|
(908
|
)
|
|
(0.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Operations
|
24,196
|
|
|
10.1
|
%
|
|
23,476
|
|
|
10.2
|
%
|
|
720
|
|
|
(0.1
|
)%
|
I/DD revenue
I/DD gross revenue for the three months ended
December 31, 2016
increased by
$9.1 million
, or 3.9%, compared to the three months ended
December 31, 2015
. The increase in I/DD gross revenue included
$4.4 million
from organic growth and
$4.7 million
from acquisitions that closed during and after the three months ended
December 31, 2015
. The organic growth was the result of a
2.5%
increase in average billing rates compared to the three months ended
December 31, 2015
.
Sales adjustments for the three months ended
December 31, 2016
increased by
$0.8 million
, or
0.3%
as a percentage of gross revenue, compared to the three months ended
December 31, 2015
.
I/DD cost of revenue
I/DD costs of revenues for the three months ended
December 31, 2016
increased as a percentage of gross revenue by
0.6%
, as compared to the three months ended
December 31, 2015
. This was primarily due to an increase in direct labor costs of
0.4%
and in occupancy costs of
0.4%
as a percentage of gross revenue. The increase in direct labor costs was due to higher amounts of overtime pay as compared to the three months ended
December 31, 2015
and an increase in health insurance expense resulting from higher enrollment and utilization in our employee health insurance plans. The higher amounts of overtime were the result of vacant positions as we continue to experience increased competition for labor in some markets. The increase in occupancy costs as a percentage of gross revenue was primarily due to the impact of programs with higher levels of open occupancy.
I/DD operating expenses
I/DD general and administrative expenses as a percentage of gross revenue decreased by
0.5%
during the three months ended
December 31, 2016
. The decrease in general and administrative expenses during the three months ended
December 31, 2016
is primarily due our cost containment efforts in administrative staffing, business and office related costs. Depreciation and amortization expense as a percentage of gross revenue decreased to
3.8%
as compared to
4.1%
during the three months ended
December 31, 2015
.
SRS Results of Operations
The following table sets forth the results of operations for the SRS segment for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
|
|
|
2016
|
|
2015
|
|
|
|
Change in %
of gross
revenue
|
|
Amount
|
|
% of gross
revenue
|
|
Amount
|
|
% of gross
revenue
|
|
Increase
(Decrease)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
SRS gross revenue
|
75,930
|
|
|
100.0
|
%
|
|
69,186
|
|
|
100.0
|
%
|
|
6,744
|
|
|
|
Sales adjustments
|
(1,630
|
)
|
|
(2.1
|
)%
|
|
(1,149
|
)
|
|
(1.7
|
)%
|
|
(481
|
)
|
|
(0.4
|
)%
|
SRS net revenue
|
74,300
|
|
|
97.9
|
%
|
|
68,037
|
|
|
98.3
|
%
|
|
6,263
|
|
|
(0.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenue:
|
|
|
|
|
|
|
|
|
|
|
|
Direct labor costs
|
38,974
|
|
|
51.3
|
%
|
|
35,121
|
|
|
50.8
|
%
|
|
3,853
|
|
|
0.5
|
%
|
Client program costs
|
5,531
|
|
|
7.3
|
%
|
|
4,952
|
|
|
7.2
|
%
|
|
579
|
|
|
0.1
|
%
|
Client occupancy costs
|
8,320
|
|
|
11.0
|
%
|
|
7,892
|
|
|
11.4
|
%
|
|
428
|
|
|
(0.4
|
)%
|
Other direct costs
|
2,280
|
|
|
3.0
|
%
|
|
2,077
|
|
|
2.9
|
%
|
|
203
|
|
|
0.1
|
%
|
Total cost of revenues
|
55,105
|
|
|
72.6
|
%
|
|
50,042
|
|
|
72.3
|
%
|
|
5,063
|
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
6,629
|
|
|
8.7
|
%
|
|
6,348
|
|
|
9.2
|
%
|
|
281
|
|
|
(0.5
|
)%
|
Depreciation and amortization
|
5,747
|
|
|
7.6
|
%
|
|
5,892
|
|
|
8.5
|
%
|
|
(145
|
)
|
|
(0.9
|
)%
|
Total operating expenses
|
12,376
|
|
|
16.3
|
%
|
|
12,240
|
|
|
17.7
|
%
|
|
136
|
|
|
(1.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from Operations
|
6,819
|
|
|
9.0
|
%
|
|
5,755
|
|
|
8.3
|
%
|
|
1,064
|
|
|
0.7
|
%
|
SRS revenue
SRS gross revenue for the three months ended
December 31, 2016
increased by
$6.7 million
, or 9.7%, compared to the three months ended
December 31, 2015
. The increase in SRS gross revenue included
$5.0 million
from organic growth and
$1.8 million
from acquisitions that closed during and after the three months ended
December 31, 2015
. The organic growth was driven by increases in volume of
4.7%
and in the average billing rate of
2.5%
. The increase in volume was primarily driven by lower levels of open occupancy due to the maturation of programs started in recent years.
Sales adjustments for the three months ended
December 31, 2016
increased by $0.5 million as compared to the three months ended
December 31, 2015
.
SRS cost of revenue
SRS segment’s cost of revenues for the three months ended
December 31, 2016
increased as a percentage of gross revenue by
0.3%
as compared to the three months ended
December 31, 2015
. The increase was primarily due to an increase in direct labor costs of
0.5%
offset by a decrease in client occupancy costs of
0.4%
. The increase in direct labor costs as a percentage of gross revenue was primarily due to an increase in therapy and nursing consultant costs. The decrease in client occupancy costs as a percentage of revenue was primarily driven by lower levels of open occupancy resulting from the maturation of programs started in recent years.
SRS operating expenses
SRS general and administrative expenses as a percentage of gross revenue decreased by
0.5%
during the three months ended
December 31, 2016
. The decrease in general and administrative expenses during the three months ended
December 31, 2016
is primarily due to our cost containment efforts in administrative staffing, business and office related costs. Depreciation and amortization expense as a percentage of gross revenue decreased to
7.6%
as compared to
8.5%
during the three months ended
December 31, 2015
.
ARY Results of Operations
The following table sets forth the results of operations for the ARY segment for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
|
|
|
2016
|
|
2015
|
|
|
|
Change in %
of gross
revenue
|
|
Amount
|
|
% of gross
revenue
|
|
Amount
|
|
% of gross
revenue
|
|
Increase
(Decrease)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
ARY gross revenue
|
35,965
|
|
|
100.0
|
%
|
|
42,911
|
|
|
100.0
|
%
|
|
(6,946
|
)
|
|
|
Sales adjustments
|
(208
|
)
|
|
(0.6
|
)%
|
|
(717
|
)
|
|
(1.7
|
)%
|
|
509
|
|
|
1.1
|
%
|
ARY net revenue
|
35,757
|
|
|
99.4
|
%
|
|
42,194
|
|
|
98.3
|
%
|
|
(6,437
|
)
|
|
1.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
27,262
|
|
|
75.7
|
%
|
|
33,213
|
|
|
77.5
|
%
|
|
(5,951
|
)
|
|
(1.8
|
)%
|
General and administrative
|
3,162
|
|
|
8.8
|
%
|
|
5,556
|
|
|
12.9
|
%
|
|
(2,394
|
)
|
|
(4.1
|
)%
|
Depreciation and amortization
|
1,421
|
|
|
4.0
|
%
|
|
1,529
|
|
|
3.6
|
%
|
|
(108
|
)
|
|
0.4
|
%
|
Income from Operations
|
3,912
|
|
|
10.9
|
%
|
|
1,896
|
|
|
4.3
|
%
|
|
2,016
|
|
|
6.6
|
%
|
ARY revenue
ARY gross revenue for the three months ended
December 31, 2016
decreased by
$6.9 million
, or 16.2%, compared to the three months ended
December 31, 2015
. The
$6.9 million
decrease in ARY gross revenue was due to a
21.4%
decrease in volume due to the ARY divestitures during the first half of fiscal 2016. These divestitures resulted in a decrease of $7.2 million in gross revenue, which was partially offset by an increase in revenue in the remaining ARY states.
Sales adjustments for the three months ended
December 31, 2016
decreased by
$0.5 million
, or
1.1%
as a percentage of gross revenue, compared to the three months ended
December 31, 2015
.
ARY cost of revenue
ARY cost of revenue for the three months ended
December 31, 2016
decreased as a percentage of gross revenue by
1.8%
, as compared to the three months ended
December 31, 2015
. This was primarily due to the positive impact of divesting lower margins ARY operations during the first half of fiscal 2016.
ARY operating expenses
General and administrative expenses as a percentage of gross revenue decreased by
4.1%
during the three months ended
December 31, 2016
. The decrease in general and administrative expenses is primarily due to decreases in administrative occupancy costs resulting from the ARY divestitures and the
$2.1 million
of exit costs incurred in the three months ended December 31, 2015 in connection with these divestitures.
Depreciation and amortization expense during the three months ended December 31, 2016 decreased by $0.1 million as compared to the three months ended December 31, 2015.
Corporate and Other Results of Operations
The following table sets forth the results of operations for Corporate and Other for the periods indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended December 31,
|
|
|
|
2016
|
|
2015
|
|
|
|
Amount
|
|
Amount
|
|
Increase
(Decrease)
|
Revenue:
|
|
|
|
|
|
Corporate and Other gross revenue
|
$
|
11,348
|
|
|
$
|
5,571
|
|
|
$
|
5,777
|
|
Sales adjustments
|
(259
|
)
|
|
2
|
|
|
(261
|
)
|
Corporate and Other net revenue
|
11,089
|
|
|
5,573
|
|
|
5,516
|
|
|
|
|
|
|
|
Cost of revenues
|
9,337
|
|
|
3,978
|
|
|
5,359
|
|
General and administrative
|
19,367
|
|
|
24,370
|
|
|
(5,003
|
)
|
Depreciation and amortization
|
1,841
|
|
|
1,146
|
|
|
695
|
|
Income from Operations
|
(19,456
|
)
|
|
(23,921
|
)
|
|
4,465
|
|
Corporate and Other revenue
Corporate and Other revenue consists of revenue from our ADH business. ADH gross revenue for the three months ended
December 31, 2016
increased by
$5.8 million
, or
103.7%
, compared to the three months ended
December 31, 2015
. The increase in gross revenue included
$0.6 million
from organic ADH growth and
$5.2 million
from ADH acquisitions that closed after the three months ended
December 31, 2015
. The organic growth was the result of a
6.6%
increase in volume and a
3.8%
increase in the average billing rate compared to the three months ended
December 31, 2015
. The increase in organic volume was driven by new starts.
Corporate and Other cost of revenue
Corporate and Other cost of revenue for the three months ended
December 31, 2016
increased as a percentage of gross revenue by
10.9%
, as compared to the three months ended
December 31, 2015
. The increase was due to the impact of an acquisition with lower operating margins and costs associated with our new starts.
Corporate and Other operating expense
General and administrative expenses for the three months ended
December 31, 2016
decreased by
$5.0 million
as compared to three months ended December 31, 2015. This was primarily due to a decrease of $9.6 million in stock based compensation resulting from a $10.5 million charge recorded in the first quarter of fiscal 2016 related to the vesting of awards under our former equity plan. The decrease in general and administrative costs was partially offset by the impact of a $3.2 million favorable adjustment recorded during the first quarter of the prior year related to acquisition related contingent consideration liabilities. Depreciation and amortization expense for the three months ended
December 31, 2016
decreased by $0.7 million as compared to the three months ended
December 31, 2015
.
Consolidated Other income (expense)
Other income (expense), net, which primarily consists of interest income and mark to market adjustments of the cash surrender value of Company owned life insurance policies and the accretion of interest on acquisition related contingent consideration liabilities, was
$0.1 million
of income for the three months ended
December 31, 2016
compared to
$0.8 million
of expense for the three months ended
December 31, 2015
. Other income (expense), net for the three months ended December 31, 2015, includes a $1.3 million loss on the sale of ARY operations in the state of North Carolina.
Consolidated Provision (benefit) for income taxes
For the three months ended
December 31, 2016
, our effective income tax rate was
40.7%
compared to an effective tax rate of
(155.5)%
for the three months ended
December 31, 2015
. 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, but are not consistent from year to year. 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 change in the effective tax rate during the three months ended
December 31, 2016
compared to the three months ended
December 31, 2015
is primarily due to $10.5 million of stock-based compensation 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 three months ended
December 31, 2015
which resulted in an abnormally high tax rate.
Liquidity and Capital Resources
Our principal uses of cash are to meet working capital requirements, fund debt obligations and finance capital expenditures and acquisitions. Cash flows from operations have historically been sufficient to meet these cash requirements. Our principal sources of funds are cash flows from operating activities, cash on hand, available borrowings under our senior revolver and proceeds from the sale of equity securities.
Operating activities
Net cash provided by operating activities was
$15.8 million
for the
three
months ended
December 31, 2016
, compared to cash provided by operating activities of
$6.6 million
for the
three
months ended
December 31, 2015
. The increase in cash provided by operating activities was primarily due to a decrease in cash paid for federal income taxes during the
three
months ended
December 31, 2016
as compared to the three months ended December 31, 2015.
Investing a
c
tivities
Net cash used in investing activities was
$10.6 million
and
$13.1 million
for the
three
months ended
December 31, 2016
and
2015
, respectively. Cash paid for property and equipment for the
three
months ended
December 31, 2016
was
$11.3 million
, or
3.2%
of net revenue, compared to
$9.1 million
, or
2.6%
of net revenue, for the
three
months ended
December 31, 2015
. During the
three
months ended
December 31, 2016
we did not complete any acquisitions. During the
three
months ended
December 31, 2015
, we paid
$4.2 million
for two acquisitions.
Financing activities
Net cash used in financing activities was
$2.2 million
for the
three
months ended
December 31, 2016
as compared to
$1.0 million
for the
three
months ended
December 31, 2015
.
At
December 31, 2016
, we had no outstanding loans and
$117.1 million
of availability under the senior revolver due to
$2.9 million
in standby letters of credit issued under the senior revolver, which reduce the availability under the senior revolver. Letters of credit can be issued under our institutional letter of credit facility up to the
$50.0 million
limit, subject to certain maintenance and issuance limitations and letters of credit in excess of that amount reduce availability under our senior revolver. As of
December 31, 2016
,
$47.4 million
of letters of credit were issued under the institutional letter of credit facility and
$2.9 million
of letters of credit were issued under the senior revolver.
We believe that available borrowings under our senior revolver and cash flow from operations will provide sufficient liquidity and capital resources to meet our financial obligations for the next twelve months, including scheduled principal and interest payments, as well as to provide funds for working capital, acquisitions, capital expenditures and other needs. No assurance can be given, however, that this will be the case.
Debt and Financing Arrangements
Senior Secured Credit Facilities
On January 31, 2014, NMHI and NMHH, wholly-owned subsidiaries of Civitas, entered into a new senior credit agreement (the “senior credit agreement”) with Barclays Bank PLC, as administrative agent, and the other agents and lenders named therein, for the new senior secured credit facilities (the “senior secured credit facilities”). 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 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”). As of
December 31, 2016
, NMHI had
$637.4 million
of borrowings under the term loan and no borrowings under the senior revolver. The aggregate amount of the revolving commitment under the senior revolver as of
December 31, 2016
was $120.0 million.
Covenants
The senior credit agreement also contains a number of covenants that, among other things, restrict, subject to certain exceptions, NMHI’s ability and the ability of its subsidiaries to: (i) incur additional indebtedness; (ii) create liens on assets; (iii) engage in mergers or consolidations; (iv) sell assets; (v) pay dividends and distributions or repurchase our capital stock; (vi) enter into swap transactions; (vii) make investments, loans or advances; (viii) repay certain junior indebtedness; (ix) engage in certain transactions with affiliates; (x) enter into sale and leaseback transactions; (xi) amend material agreements governing certain of our junior indebtedness; (xii) change our lines of business; (xiii) make certain acquisitions; and (xiv) limitations on the letter of credit cash collateral account. If we withdraw any of the $50.0 million from the cash collateral account supporting the issuance of letters of credit, we must use the cash to either prepay the term loan facility or to secure any other obligations under the senior secured credit facilities in a manner reasonably satisfactory to the administrative agent. We were in compliance with these covenants as of
December 31, 2016
and
September 30, 2016
. The senior credit agreement contains customary affirmative covenants and events of default.
The senior credit agreement contains a springing financial covenant. If, at the end of any fiscal quarter, NMHI's usage of the senior revolver exceeds
30%
of the commitments thereunder, NMHI 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
December 31, 2016
or
September 30, 2016
as NMHI's usage of the senior revolver did not exceed the threshold for those quarters.
Inflation
We do not believe that general inflation in the U.S. economy has had a material impact on our financial position or results of operations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet transactions or interests.
Critical Accounting Policies
The Company's critical accounting policies are discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations and notes accompanying the consolidated financial statements that appear in the Annual Report on Form 10-K for the fiscal year ended September 30, 2016. Except as otherwise disclosed in the financial statements and accompanying notes included in this report, there were no material changes subsequent to the filing of the Annual Report on Form 10-K for the fiscal year ended September 30, 2016, in the Company's critical accounting policies or in the assumptions or estimates used to prepare the financial information appearing in this report.
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles (“GAAP”). 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.
We believe our application of accounting policies, and the estimates inherently required therein, are reasonable. These accounting policies and estimates are constantly reevaluated, and adjustments are made when facts and circumstances dictate a change.
Subsequent Events
On January 31, 2017, we acquired the assets of a company complementary to our I/DD business for aggregate consideration of
$2.8 million
.
Forward-Looking Statements
Some of the matters discussed in this report may constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
These statements relate to future events or our future financial performance, and include statements about our expectations for future periods with respect to our markets, demand for our services, the political climate and budgetary and rate environment, the impact of the redesign of the I/DD Waiver program in West Virginia, our expansion efforts and the impact of our recent acquisitions, our plans for investments to further grow and develop our business, the impact of our business optimization and cost savings project, our margins, our liquidity and our labor costs, including the impact of the FLSA Final Rule. Terminology such as “may,” “will,” “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential” or “continue,” or similar expressions are intended to identify these forward looking statements. These statements are only predictions. Actual events or results may differ materially.
The information in this report is not a complete description of our business or the risks associated with our business. There can be no assurance that other factors will not affect the accuracy of these forward-looking statements or that our actual results will not differ materially from the results anticipated in such forward-looking statements. While it is not possible to identify all such factors, factors that could cause actual results to differ materially from those estimated by us include, but are not limited to, those factors or conditions described in our Annual Report on Form 10-K for the year ended
September 30, 2016
, as well as the following:
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reductions or changes in Medicaid or other funding or changes in budgetary priorities by federal, state and local governments;
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substantial claims, litigation and governmental proceedings;
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an increase in labor costs or labor-related liability;
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reductions in reimbursement rates, policies or payment practices by our payors;
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matters involving employees that expose us to potential liability;
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our ability to maintain effective internal controls;
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our ability to attract and retain experienced personnel;
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our ability to comply with complicated billing and collection rules and regulations;
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failure to comply with reimbursement procedures and collect accounts receivable;
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our substantial amount of debt, our ability to meet our debt service obligations and our ability to incur additional debt;
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changes in economic conditions;
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an increase in our self-insured retentions and changes in the insurance market for professional and general liability, workers’ compensation and automobile liability and our claims history and our ability to obtain coverage at reasonable rates;
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an increase in workers’ compensation related liability;
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our ability to control labor costs, including healthcare costs imposed by the Patient Protection and Affordable Care Act;
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our ability to establish and maintain relationships with government agencies and advocacy groups;
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negative publicity or changes in public perception of our services;
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our ability to maintain our status as a licensed service provider in certain jurisdictions;
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our susceptibility to any reduction in budget appropriations for our services in Minnesota or any other adverse developments in that state;
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our ability to maintain, expand and renew existing services contracts and to obtain additional contracts or acquire new licenses;
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our ability to successfully integrate acquired businesses;
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our inability to successfully expand into adjacent markets;
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government regulations, changes in government regulations and our ability to comply with such regulations;
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decrease in popularity of home- and community-based human services among our targeted client populations and/or state and local governments;
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our ability to operate our business due to constraints imposed by covenants in our senior credit agreement;
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our ability to retain the continued services of certain members of our management team;
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our ability to manage and integrate key administrative functions;
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failure of our information systems or failure to upgrade our information systems when required;
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information technology failure, inadequacy, interruption or security failure;
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write-offs of goodwill or other intangible assets; and
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natural disasters or public health catastrophes.
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Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Moreover, we do not assume responsibility for the accuracy and completeness of the forward-looking statements. All written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the “Risk Factors” and other cautionary statements referenced and included herein. We are under no duty to update any of the forward-looking statements after the date of this report to conform such statements to actual results or to changes in our expectations.
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Item 3.
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Quantitative and Qualitative Disclosures about Market Risk
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We are exposed to changes in interest rates as a result of our outstanding variable rate debt. The variable rate debt outstanding relates to the term loan, which bears interest at (i) a rate equal to the greater of (a) the prime rate, (b) the federal funds rate plus 1/2 of 1% and (c) the Eurodollar rate for an interest period of one-month beginning on such day plus 100 basis points; plus 2.25%; or (ii) the Eurodollar rate for a one, two, three or six month period at our option (subject to a LIBOR floor of 1.00%); plus 3.25% A 1% increase in the interest rate on our floating rate debt as of
December 31, 2016
would have increased cash interest expense on the floating rate debt by approximately
$6.5 million
per annum, without giving effect to the interest rate swap agreement discussed below.
To reduce the interest rate exposure related to our variable debt, NMHI entered into two interest rate swaps in an aggregate notional amount of $375.0 million, effective on January 20, 2015. Under the terms of the swaps, we 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 we 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.
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Item 4.
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Controls and Procedures.
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(a) Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-15(e)) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are intended to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. As of
December 31, 2016
, the end of the period covered by this Quarterly Report on Form 10-Q, our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) under the Exchange Act. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of
December 31, 2016
.
(b) Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the quarter ended
December 31, 2016
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.