UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the period ended March 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number: 000-19854
APRIA HEALTHCARE GROUP INC.
(Exact name of registrant as specified in its charter)
Delaware 33-0488566
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
3560 Hyland Avenue, Costa Mesa, CA 92626
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (714)427-2000
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
There were 51,388,689 shares of Common Stock, $.001 par value,
outstanding at May 4, 1997.
<PAGE>
APRIA HEALTHCARE GROUP INC.
FORM 10-Q
For the period ended March 31, 1997
PART I. FINANCIAL INFORMATION
- -----------------------------
Item 1. Financial Statements (unaudited)
Consolidated Balance Sheets
Consolidated Income Statements
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
- ---------------------------
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security
Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
- ----------
<PAGE>
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
---------- -----------
(unaudited)
(Dollars in thousands)
<S> <C> <C>
CURRENT ASSETS
Cash $ 17,709 $ 26,930
Accounts receivable, less allowance
for doubtful accounts of $72,379
and $73,809 at March 31, 1997 and
December 31, 1996, respectively 367,043 335,616
Inventories 57,907 55,733
Deferred income taxes 31,244 31,106
Refundable and prepaid income taxes 14,571 34,598
Prepaid expenses and other
current assets 9,475 9,764
---------- ----------
TOTAL CURRENT ASSETS 497,949 493,747
PATIENT SERVICE EQUIPMENT, less accumulated
depreciation of $229,445 and $198,675 at
March 31, 1997 and December 31, 1996,
respectively 211,307 213,602
PROPERTY, EQUIPMENT AND IMPROVEMENTS, NET 119,196 120,030
COVENANTS NOT TO COMPETE, NET 15,782 17,054
GOODWILL, NET 290,409 295,536
OTHER ASSETS 8,089 9,141
---------- ----------
$1,142,732 $1,149,110
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 74,235 $ 83,619
Accrued payroll and related taxes
and benefits 24,994 34,850
Accrued restructuring costs 5,573 7,131
Other accrued liabilities 45,636 44,568
Current portion of long-term debt 11,202 11,588
---------- ----------
TOTAL CURRENT LIABILITIES 161,640 181,756
LONG-TERM DEBT 614,175 623,276
DEFERRED INCOME TAXES 2,695 1,143
STOCKHOLDERS' EQUITY
Preferred Stock, $.001 par value:
10,000,000 shares authorized;
none issued - -
Common Stock, $.001 par value:
150,000,000 shares authorized;
51,349,449 and 51,203,450 shares issued
and outstanding at March 31, 1997 and
December 31, 1996, respectively 51 51
Additional paid-in capital 321,997 319,950
Retained earnings 42,174 22,934
---------- ----------
364,222 342,935
COMMITMENTS AND CONTINGENCIES - -
---------- ----------
$1,142,732 $1,149,110
========== ==========
</TABLE>
See notes to consolidated financial statements.
<PAGE>
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED INCOME STATEMENTS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------
1997 1996
-------- --------
(Dollars in thousands,
except per share data)
<S> <C> <C>
Net revenues $313,863 $295,303
Costs and expenses:
Cost of net revenues 104,679 94,091
Selling, distribution and administrative 147,312 140,944
Provision for doubtful accounts 15,764 13,298
Amortization of intangible assets 4,198 4,102
-------- --------
OPERATING INCOME 41,910 42,868
Interest expense 12,759 11,108
-------- --------
INCOME BEFORE TAXES 29,151 31,760
Income taxes 9,911 11,434
-------- --------
NET INCOME $ 19,240 $ 20,326
======== ========
Earnings per common and common
equivalent share $ 0.37 $ 0.39
======== ========
Weighted average number of common
and common equivalent shares
outstanding 51,918 51,997
Earnings per common and common
equivalent share assuming
full dilution $ 0.37 $ 0.39
======== ========
Weighted average number of common
and common equivalent shares
outstanding assuming full dilution 51,918 52,221
</TABLE>
See notes to consolidated financial statements.
<PAGE>
APRIA HEALTHCARE GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31
------------------
1997 1996
------- -------
(Dollars in thousands)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 19,240 $ 20,326
Items included in net income not
requiring (providing) cash:
Provision for doubtful accounts 15,764 13,298
Depreciation 29,947 19,855
Amortization of intangible assets 4,198 4,102
Amortization of deferred debt costs 279 260
(Gain) loss on sale of property,
equipment and improvements (8) 10
Gain on disposition of assets (429) -
Deferred income taxes 1,437 114
Changes in operating assets and
liabilities, net of effects
of acquisitions:
Increase in accounts receivable (47,493) (61,880)
Increase in inventories (2,290) (8,533)
Decrease in prepaids and other assets 20,751 9,043
Decrease in accounts payable (9,384) (27,090)
Decrease in accrued payroll
and other liabilities (8,958) (1,359)
Decrease in accrued restructuring
costs (1,558) (5,318)
Net purchases of patient service
equipment, net of effects
of acquisitions (19,515) (25,186)
------- -------
NET CASH PROVIDED BY (USED IN)
OPERATING ACTIVITIES 1,981 (62,358)
INVESTING ACTIVITIES
Purchases of property, equipment
and improvements, net of
effects of acquisitions (6,800) (17,322)
Proceeds from sale of property,
equipment and improvements 53 18
Proceeds on disposition of assets 5,196 -
Acquisitions and payments of
contingent consideration (732) (489)
------- -------
NET CASH USED IN
INVESTING ACTIVITIES (2,283) (17,793)
FINANCING ACTIVITIES
Proceeds under revolving
credit facility 57,800 125,100
Payments under revolving
credit facility (65,250) (46,900)
Payments of senior and other
long-term debt (3,059) (2,550)
Capitalized debt costs, net - (11)
Issuances of Common Stock 1,590 9,735
------- -------
NET CASH (USED IN) PROVIDED BY
FINANCING ACTIVITIES (8,919) 85,374
NET (DECREASE) INCREASE IN CASH (9,221) 5,223
Cash at beginning of period 26,930 18,829
------- -------
CASH AT END OF PERIOD $17,709 $24,052
======= =======
</TABLE>
See notes to consolidated financial statements.
<PAGE>
APRIA HEALTHCARE GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - BASIS OF PRESENTATION
The accompanying consolidated financial statements include the
accounts of Apria Healthcare Group Inc. ("the Company") and its
subsidiaries. All significant intercompany transactions and
accounts have been eliminated
In the opinion of management, all adjustments, consisting of
normal recurring accruals, necessary for a fair presentation of
the results of operations for the interim periods presented, have
been reflected herein. The results of operations for interim
periods are not necessarily indicative of the results to be
expected for the entire year. For further information, refer to
the consolidated financial statements and footnotes thereto for
the year ended December 31, 1996, filed with the Company's 1996
Form 10-K.
NOTE B - USE OF ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make assumptions that affect the amounts reported in the
financial statements and accompanying notes. Such amounts
include, among others, the allowance for doubtful accounts,
patient service equipment reserves, other asset valuation
allowances and certain liabilities. Management periodically re-
evaluates the estimates inherent in certain financial statement
amounts and may adjust accordingly. Actual results could differ
from the estimates.
NOTE C - INCOME TAXES
Income taxes have been provided at the effective tax rate
expected for the year. The Company's effective tax rate differs
from the statutory rate as a result of state income taxes (net of
federal benefit) and the use of net operating loss carryforwards.
NOTE D - BUSINESS COMBINATIONS AND DISPOSITIONS
The Company periodically makes acquisitions of complementary
businesses in specific geographic markets. Acquisitions that
closed during the three month period ended March 31, 1997
resulted in cash payments of approximately $450,000.
On January 30, 1997, after obtaining a release from the Omnicare
Board of Directors, the Company sold all its 1,875,000 ordinary
shares of Omnicare plc, a public limited company incorporated
under the laws of England, to a former director. The Company had
accounted for this investment using the equity method. Cash
proceeds from the sale were $2,791,000, which resulted in a gain
of $1,232,000.
On March 14, 1997, the Company sold M&B Ventures, Inc., its
Medicare-certified home health agency, which operated in South
Carolina under the assumed business names of Doctors Home Health
and Advanced Care Service to North Trident Regional Hospital,
Inc., a subsidiary of Columbia/HCA Healthcare Corporation. Cash
proceeds from the sale were $2,400,000, resulting in a loss on
the sale of approximately $803,000. The operations of Doctor's
Home Health and Advanced Care Service had revenues of
approximately $1,356,000 and $2,143,000 for the three months
ended March 31, 1997 and 1996, respectively.
NOTE E - RESTRUCTURING COSTS
In connection with the 1995 merger between Abbey Healthcare Group
Incorporated and Homedco Group, Inc., the Company adopted a plan
to restructure and consolidate its operating locations and
administrative functions within specific geographic areas. The
plan, which was completed by September 1996, resulted in a
restructuring charge in 1995 of approximately $68,304,000,
consisting of accrued costs and impairments. The following table
summarizes amounts paid during the three months ended March 31,
1997 and the remaining accrual at March 31, 1997.
Accrual at December 31, 1996 $7,131,000
Severance amounts paid through March 31, 1997 (956,000)
Other amounts paid through March 31, 1997 (602,000)
----------
Accrual at March 31, 1997 $5,573,000
==========
The remaining accrual balance consists of $1,070,000 for
severance and related personnel costs, $4,214,000 for branch and
billing center closure costs and $289,000 for miscellaneous
restructuring costs.
NOTE F - EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be
adopted by the Company on December 31, 1997. At that time, the
Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods.
Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded.
The impact of Statement 128 on the calculation of primary and
fully diluted earnings per share for the periods presented herein
is not expected to be material.
NOTE G - EQUITY
The change in stockholders' equity, other than from net income,
resulted primarily from the exercise of stock options and the tax
benefit associated with disqualifying dispositions of incentive
stock options and exercises of nonqualified stock options. For
the three months ended March 31, 1997, proceeds from the exercise
of stock options amounted to $1,590,000 and the related tax
benefit amounted to $426,000.
NOTE H - COMMITMENTS AND CONTINGENCIES
The Company is engaged in the defense of certain claims and
lawsuits arising out of the ordinary course and conduct of its
business, the outcome of which are not determinable at this time.
The Company has insurance policies covering such potential losses
where such coverage is cost effective. In the opinion of
management, any liability that might be incurred by the Company
upon the resolution of these claims and lawsuits will not, in the
aggregate, have a material adverse effect on the consolidated
results of operations or financial position of the Company.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
- ---------------------
Net revenues increased 6.3% to $313.9 million for the first
quarter of 1997 compared with $295.3 million for the same quarter
last year. The growth in 1997, versus 1996, was primarily
attributable to volume increases in managed care markets and, to
a lesser extent, traditional markets. Price competition in the
managed care environment had a mitigating impact on the growth.
Respiratory therapy, infusion therapy and home medical
equipment/other revenues represented 50.7%, 23.9% and 25.4%,
respectively, of total revenues for the first quarter in 1997.
The relationship of respiratory therapy to total revenues
decreased by 1.2% as compared to the first quarter of 1996
largely due to a temporary shift in focus away from traditional
business, the impact of which is greatest on the respiratory
line. This trend, however, appears to be reversing as evidenced
by the increase in the respiratory line in the first quarter of
1997, when compared to the fourth quarter of 1996. The 1997
sales commission plan emphasizes higher-margin traditional
business.
Gross margins were 66.6% in the first quarter of 1997, compared
to 68.1% for the first quarter of 1996. The decrease is
primarily attributable to the Company's increased participation
in the managed care environment. The intense pressure by
employers on managed care organizations contributed to greater
price pressure on subcontracted providers such as the Company.
Also, competing in the managed care market requires a broad
offering of products and services, including lower-margin
services, medical equipment and supplies. To address this
downward pressure on gross margins, the Company has adopted
numerous initiatives, including the establishment of automated
purchasing budgets to more effectively control the purchase and
use of patient service equipment and supplies, the placement of
sales force initiatives on certain higher-margin products and
services and an effort to redirect the business development focus
toward higher-margin traditional referral/payor sources. In
addition, during the fourth quarter of 1996, management initiated
a contract assessment process whereby the Company's top revenue-
producing accounts are being reviewed for profitability. The
objective of the review is to renegotiate the contracts with
better terms, improve the business mix and eliminate those not
meeting acceptable profitability levels. During the first
quarter of 1997, the Company completed its review of its top fee-
for-service contracts and developed a set of recommended
revisions; negotiations for those revisions are currently in
process. In addition, the Company has just completed the review
phase of its capitation agreements and has identified the points
requiring renegotiation. Further, now that all locations have
been converted to two standardized information systems (primary
system captures activity for respiratory, home medical
equipment/other; secondary system captures infusion activity),
management has access to information not previously available.
Detailed management reporting tools are being developed to
quickly identify products and services not meeting profitability
standards and to evaluate product/service mix at an individual
branch level.
Selling, distribution and administrative expenses expressed as
percentages of net revenues were 46.9% and 47.7% for the first
quarters of 1997 and 1996, respectively. Included in 1996 were
various integration costs recorded in conjunction with the merger
between Abbey Healthcare Group Incorporated and Homedco Group,
Inc. Such costs included employee relocation, temporary and
transitional employee costs, overtime pay and consulting. Also
reflected in the quarter-to-quarter improvement is the success of
various cost control measures implemented during the 1996 fiscal
year.
The provision for doubtful accounts, as a percentage of net
revenues, was 5.0% for the first quarter of 1997, compared to
4.5% for the first quarter in the prior year. The increased
provision rate corresponds to an increase in accounts receivable
aged over 180 days, which is largely attributed to the Company's
1996 information systems conversions [see Liquidity and Capital
Resources].
Interest expense was $12.8 million for the first quarter of 1997,
compared to $11.1 million for the first quarter of 1996. The
increase represents the impact of an increase in long-term debt
as mitigated by lower interest rates.
Liquidity and Capital Resources
- -------------------------------
Cash provided by the Company's operations was $2.0 million for
the first quarter of 1997, compared with $62.4 million used in
operations during the same period last year. The main reasons
for the significant variance between the two periods are as
follows: (1) a decrease in the magnitude of the accounts
receivable increase during the first quarter of 1997, as compared
to the same quarter in 1996, (2) a reduction in accounts payable
in the first quarter of 1996 which resulted from the elimination
of a processing backlog caused by the centralization of the
Company's accounts payable function, (3) the receipt of a federal
tax refund in 1997 and (4) a reduction in patient service
equipment and inventory expenditures in the first quarter of 1997
compared to the same period last year. The higher equipment and
inventory expenditures in 1996 reflect concerted efforts by the
Company to upgrade the quality of the asset base.
Although the rate of growth in accounts receivable decreased in
the first quarter of 1997 as compared to the first quarter of
1996, accounts receivable, before allowance for doubtful
accounts, increased by $30.0 million during the quarter;
approximately $21.0 million of the increase related to accounts
aged over 180 days. Days sales outstanding (DSO - calculated as
of each period-end by dividing accounts receivable less allowance
for doubtful accounts by the 90-day rolling average of net
revenues), increased from 99 days at December 31, 1996 to 105
days at March 31, 1997. Collections historically have been
slowest during the first quarter due to a slowdown in payor
processing over the holiday season and the withholding of
Medicare deductibles at the beginning of the new calendar year.
But the primary cause of the increases in accounts receivable and
DSO are the residual effects of the disruptions and delays in
billing and collection activity associated with the Company's
conversion of its field locations to the standardized information
systems and a higher than normal turnover rate among billing and
collection personnel in 1996. These activities contributed to
billing delays and errors and, ultimately, difficulties in
receiving timely reimbursement. The conversion of a field
information system to one of the standard systems required from
one to four weeks, depending on facility size, for conversion and
employee training, during which time billing and collection
activity was substantially curtailed. Resumption of billing and
collection activities to pre-conversion levels can take from six
to nine months.
To mitigate the impact of conversion disruptions and employee
turnover, the Company, among other steps, initiated collection
incentive programs with special emphasis on older accounts,
hired additional management level billing and collection
personnel and initiated reinforcement training for the billing
locations. Early in 1997, the Company took further steps to
reduce the incidence of billing errors including a process review
of the field information systems to identify opportunities to
improve billing processing, timeliness and accuracy, validation
of system pricing files and implementation of billing center
audits to assess compliance with billing practices and
procedures. Further, in April 1997, the Company announced a new
organizational structure and the appointment of an executive vice
president of operations; these changes are intended to heighten
the Company's focus on accounts receivable collections and
information systems management.
The conversions, which commenced in the third quarter of 1995,
were completed by September 30, 1996. Approximately 140
locations were converted in the second and third quarters of
1996. The billing and collection processes at these locations
are currently normalizing, but a full return to routine
processing and normal collection timeframes by all locations is
not expected prior to the second half of 1997.
Long-term debt, including current maturities, decreased by $9.5
million from December 31, 1996 to March 31, 1997. In addition to
the cash provided by operations, the decrease in long-term debt
can be attributed to a reduction in property, plant and equipment
expenditures and proceeds received on the disposition of assets
in two transactions as described below.
The decrease in refundable and prepaid income taxes during the
first quarter is primarily related to a federal tax refund
received and the application of previously paid federal taxes
against current tax liabilities. The decrease in accrued payroll
and benefits at March 31, 1997, compared to December 31, 1996, is
due to the difference in the number of days' costs accrued at
each period-end.
On January 30, 1997, after obtaining a release from the Omnicare
Board of Directors, the Company sold all its 1,875,000 ordinary
shares of Omnicare plc, a public limited company incorporated
under the laws of England, to a former director. Cash proceeds
from the sale were $2.8 million, which resulted in a gain of $1.2
million.
On March 14, 1997, the Company sold M&B Ventures, Inc., its last
remaining Medicare-certified home health agency, which operated
in South Carolina under the assumed business names of Doctors
Home Health and Advanced Care Service to North Trident Regional
Hospital, Inc., a subsidiary of Columbia/HCA Healthcare
Corporation. Cash proceeds from the sale were $2.4 million,
resulting in a loss on the sale of approximately $803,000.
Overall, the Company believes that cash provided by operations
and amounts available under its existing credit facilities will
be sufficient to finance its current operations for at least the
next 12 months. At March 31, 1997, availability under the credit
facility was $387.0 million.
<PAGE>
PART II. OTHER INFORMATION
- --------------------------
Item 1-5. Not applicable
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits:
11.1 Statement of Computation of Earnings per
Share.
27.1 Financial Data Schedule.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the
quarter for which this report is filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Apria Healthcare Group Inc.
-----------------------------------
Registrant
May 15, 1997 /s/Lawrence H. Smallen
-----------------------------------
Lawrence H. Smallen
Chief Financial Officer,
Senior Vice President, Finance
and Treasurer
(Principal Financial Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AT MARCH 31, 1997 (UNAUDITED) AND CONSOLIDATED
INCOME STATEMENT FOR THE THREE MONTHS ENDED MARCH 31, 1997 (UNAUDITED) AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<CASH> 17,709
<SECURITIES> 0
<RECEIVABLES> 439,422
<ALLOWANCES> 72,379
<INVENTORY> 57,907
<CURRENT-ASSETS> 497,949
<PP&E> 651,300
<DEPRECIATION> 320,797
<TOTAL-ASSETS> 1,142,732
<CURRENT-LIABILITIES> 161,640
<BONDS> 614,175
0
0
<COMMON> 51
<OTHER-SE> 364,171
<TOTAL-LIABILITY-AND-EQUITY> 1,142,732
<SALES> 313,863
<TOTAL-REVENUES> 313,863
<CGS> 104,679
<TOTAL-COSTS> 104,679
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 15,764
<INTEREST-EXPENSE> 12,759
<INCOME-PRETAX> 29,151
<INCOME-TAX> 9,911
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 19,240
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
</TABLE>
EXHIBIT 11.1
APRIA HEALTHCARE GROUP INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
March 31,
---------------------
1997 1996
------ ------
(In thousands, except
per share data)
<S> <C> <C>
Net income for primary and fully
diluted earnings per share $19,240 $20,326
======= =======
Weighted average shares outstanding 51,261 50,168
Incremental shares - stock options 657 1,829
------- -------
Primary shares 51,918 51,997
Incremental shares - stock options - 224
------- -------
Fully diluted shares 51,918 52,221
======= =======
Primary and fully diluted
earnings per share $ 0.37 $ 0.39
======= =======
</TABLE>
