APRIA The following discussion and analysis ofApria, Inc. (the "Company," "our," or "we") and its subsidiaries financial condition and results of operations should be read in conjunction with our audited financial statements and related notes thereto included elsewhere in this report. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from management's expectations. Certain factors that could cause such differences are discussed in "Forward-Looking Information; Risk Factor Summary" and " Part I, Item 1A. Risk Factors" in this report. Our Company We are a leading provider of integrated home healthcare equipment and related services inthe United States . We offer a comprehensive range of products and services for in-home care and delivery across three core service lines: (1) home respiratory therapy (including home oxygen and NIV services); (2) OSA treatment (including CPAP and bi-level positive airway pressure devices, and patient support services); and (3) NPWT. Additionally, we supply a wide range of home medical equipment and other products and services to help improve the quality of life for patients with home care needs. Our revenues are generated through fee-for-service and capitation arrangements with Payors for equipment, supplies, services and other items we rent or sell to patients. Through our offerings, we also provide patients with a variety of clinical and administrative support services and related products and supplies, most of which are prescribed by a physician as part of a care plan. We are focused on being the industry's highest-quality provider of home healthcare equipment and related services, while maintaining our commitment to being a low-cost operator. We offer a compelling value proposition to patients, providers and Payors by allowing patients to receive necessary care and services in the comfort of their own home, while, at the same time, reducing the costs of treatment. We generated over$1.1 billion of net revenue in 2021, of which approximately 83% was from home respiratory therapy and OSA treatment, service categories in which we believe we have a leading market position. We believe our integrated product and service offerings, combined with our national scale and strong reputation, provide us with a strategic advantage in being a preferred home healthcare provider for patients, providers and Payors. Our Payors include substantially all of the national and regional insurers, managed care organizations and government Payors inthe United States . We benefit from long-standing relationships with a community of providers and referral sources for post-acute services across the acuity spectrum because of the consistency and reliability of our high quality clinical support, our national distribution footprint and our breadth of Payor relationships.
Our product and service offerings are distinguished by the complexity and sophistication required in their clinical delivery, logistical coordination and payment arrangements. We offer patients and providers differentiated clinical
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service, leveraging our protocols and expertise to improve outcomes across our
service lines. With an expansive network of delivery technicians and therapists
that is not readily replicated, we are able to provide home healthcare therapies
that require high-touch service, providing a bridge from the acute care setting
to the home. In 2021, we served over 2 million patients, made over 2.4 million
deliveries, and conducted approximately 736,000 clinician interactions with our
patients.
The healthcare sector is heavily regulated, and our business is accordingly
subject to extensive government regulation, including numerous laws directed at
regulating reimbursement of our products and services under various government
programs and preventing fraud and abuse. For additional information, see " Item
1 -Business-Government Regulation."
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Pending Merger with Owens & Minor Inc.
OnJanuary 7, 2022 , we entered into the Merger Agreement with Owens & Minor under which Owens & Minor will acquireApria for$37.50 in cash per share of common stock, representing an equity value of approximately$1.45 billion , as well as the assumption of debt and cash for a total transaction value of approximately$1.6 billion . The transaction is subject to customary closing conditions and other regulatory approvals and the approval of our stockholders and is expected to close during the first half of 2022. See further discussion at Note 13 - Subsequent Event in our audited financial statements and " Item 1A. Risk Factors - Risks Related to Proposed Merger - The failure to complete the transaction announced onJanuary 7, 2022 in a timely manner or at all could negatively impact the market price of our common stock, as well as our future business and our financial condition, results of operations and cash flows."
Trends and Factors Affecting our Future Performance
Significant trends and factors that we believe may affect our future performance include:
Growing addressable markets. We are aligned with large and growing addressable
markets across our core service lines. The broader
devices and OSA devices, which align with our home respiratory and OSA
? treatment product lines, two of our core product lines and which represent
approximately 83% of 2021 net revenue, are expected by industry analysts to
grow at CAGRs of approximately 6% and approximately 8%, respectively, between
2018 and 2025. Aging population. As the baby boomer population ages and life expectancy increases, the elderly-who comprise a large portion of our patients-will
represent a higher percentage of the overall population.
Actuary projects that the number of Medicare beneficiaries will grow, on
? average, by 2.5% annually over the period from 2020 to 2028 and the
Bureau projects that
substantially from 15.2% of the population in 2016 to 20.6% of the population
by 2030 This demographic trend has resulted in patient volume growth in the
Rising incidence of chronic diseases. Increasing obesity rates, the clinical
consequences of the high prevalence of smoking from earlier decades, the
current under-diagnosis of certain health conditions and higher diagnosis rates
for a number of chronic health conditions, such as chronic obstructive
? pulmonary disease, OSA, diabetes and others, have collectively driven growth in
the industry. We believe that in
to severe obstructive sleep apnea, while 1 in 10 adults has diabetes, with
asthma similarly prevalent among adults. We believe that patients with these
chronic conditions will increasingly be treated in their homes instead of in
the hospital setting and utilize the services that we provide.
Transition to value-based healthcare. Government and commercial Payors are
increasingly seeking ways to shift from traditional fee-for-service to a
value-based model. We believe that the ability to transition patients from the
? acute care setting to the home represents a critical part of this effort. As a
leading provider of home healthcare services, we believe that we will
increasingly benefit from this paradigm shift in the industry. In addition, we
believe our demonstrated expertise in non-traditional payment models, such as
capitation arrangements, will position us well to take advantage of this trend.
Increased prevalence of and preference for in-home treatments. Improved
technology has resulted in a wider variety of treatments being administered in
? patient homes, and medical advancements have also made medical equipment more
simple, adaptable and cost-effective for use in the home. According to CMS
estimates, between 2020 and 2028,
increase to
Consolidation of the highly fragmented market to the benefit of national
? players. Between 2012 and 2018, the overall number of DMEPOS suppliers that
bill Medicare more than$10 million annually fell 63 Table of Contents
from 73 to 57, and between 2013 and 2020, the total number of DMEPOS suppliers
that bill Medicare fell from 8,837 to 6,152, a decline of approximately 30%. We
attribute this decline to the inability of smaller regional players to make the
significant capital investment and achieve the scale required to effectively
compete in the economic environment that followed the implementation of the CBP.
We believe that the home healthcare market will continue to favor larger,
financially stable, national players with consistent, scalable, high quality
service. Decreasing price and reimbursement levels. We expect to continue to face
pricing pressures from Medicare and Medicaid, as a result of programs such as
the DMEPOS CBP or government sequestrations, as well as from our managed care
? Payors as they seek to lower costs by obtaining more favorable pricing from
providers such as us. In addition to the pricing reductions, such changes could
cause us to provide reduced levels of certain products and services in the
future, resulting in corresponding reductions in revenue.
Cost containment efforts of Payors. The consolidation of our managed care
Payors into larger purchasing groups, such as group purchasing organizations
and integrated delivery networks, has increased their negotiating and
? purchasing power. This trend, in turn, has resulted in increasing pricing
pressure on us due to the consolidation of healthcare facilities, purchasing
groups and
containment efforts, such as the CBP. Contracts with Payors that generated
approximately 1% of our revenue in 2021 will expire in 2022.
Certain additional items may impact the comparability of the historical results presented below with our future performance, such as:
Cost of being a public company. To operate as a public company, we will be
required to continue to implement changes in certain aspects of our business
and develop, manage, and train management level and other employees to comply
? with ongoing public company requirements. We will also incur new expenses as a
public company, including public reporting obligations, proxy statements,
stockholder meetings, stock exchange fees, transfer agent fees,
Impact of COVID-19 Pandemic Our priorities during the COVID-19 pandemic are protecting the health and safety of our employees (including patient-facing employees providing respiratory and other services), maximizing the availability of our services and products to support patient health needs, and the operational and financial stability of our business. In response to the COVID-19 pandemic and the National Emergency Declaration, datedMarch 13, 2020 , we activated certain business interruption protocols, including acquisition and distribution of personal protective equipment ("PPE") to our patient-facing employees, accelerated capital expenditures of certain products and relocation of significant portions of our workforce to "work-from-home" status. While the impact of the COVID-19 pandemic, the National Emergency Declaration and the various state and local government imposed stay-at-home restrictions did not have a material adverse impact on our consolidated operating results for the fiscal years endedDecember 31, 2021 and 2020, we experienced declines in net revenues in certain services associated with elective medical procedures and the disruption in physician practices (such as commencement of new CPAP services, ventilation therapy, negative pressure wound therapy, and other equipment and services) and such declines may continue during the duration of the COVID-19 pandemic. Offsetting these declines in net revenue, we have experienced an increase in net revenue related to increased demand for certain respiratory products (such as oxygen) and increased sales in our resupply business (primarily as a result of the increased ability to contact patients at home as a result of state and local government imposed stay-at-home orders). In response, we instituted temporary cost mitigation measures such as reduced hours and management of variable labor and operating costs. In addition, as part of the CARES Act (discussed in more detail in the Medicare Reimbursement section below), we experienced an increase in Medicare reimbursement rates fromMarch 6, 2020 to the end of the public health emergency and a suspension of 64
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Medicare sequestration fromMay 1, 2020 throughDecember 31, 2021 (resulting in a 2% increase in Medicare payments to all providers) resulting in a temporary increase in net revenues for certain products and services. The Protecting Medicare and American Farmers from Sequester Cuts Act, signed into law onDecember 10, 2021 , extended the payment reduction suspension at rates of 0% throughMarch 31, 2022 , and reinstated Medicare sequestration at 1% fromApril 1, 2022 throughJune 30, 2022 and 2% thereafter. Recent regulatory guidance from theCenters for Medicare and Medicaid Services expanding telemedicine and reducing documentation requirements during the emergency period resulted in increased net revenues for certain products and services. We have not experienced a significant slowdown in cash collections, and as a result our cash flow from operations has not been materially adversely impacted to date. In 2021, the global economy has, with certain setbacks, begun reopening, and wider distribution of vaccines will likely encourage greater economic activity. Nevertheless, wide disparities in vaccination rates and continued vaccine hesitancy, combined with the emergence of COVID-19 variants and surges in COVID-19 cases, could trigger the reinstatement of restrictions, including mandatory business shut-downs, travel restrictions, reduced business operations and social distancing requirements, which could dampen or delay any economic recovery. We are closely monitoring the impact of the COVID-19 pandemic, including the emergence of variant strains of the virus, on our business. While economic conditions have improved significantly from the initial outbreak of the virus, given the ongoing nature of the pandemic it is difficult to predict the future impact COVID-19 may have on our business, results of operations, financial position and cash flows. For additional information on risk factors that could impact our results, please refer to "Risk Factors" in this report.
Impact of Philips Respironics Recall
InJune 2021 , one of our suppliers,Philips Respironics , announced a voluntary recall ("Recall") for continuous and non-continuous ventilators (certain CPAP, BiLevel positive airway pressure and ventilator devices) related to polyurethane foam used in those devices. The FDA has since identified this as a Class I recall, the most serious category of recall. Because we distribute these products and provide related home respiratory services and, in part, due to the substantial number of impacted devices, our management team has devoted, and will likely continue to devote, substantial time and resources to coordinating recall-related activity and to supporting our home healthcare patients' needs. This Recall may cause us to incur significant costs, some or all of which may not be recoverable from the product manufacturer. The Recall may also materially negatively affect our revenues and results of operations as a result of patients not using their impacted devices, current shortages in the availability of both replacement devices for impacted patients and new devices for new patients, patient hesitancy to use respiratory devices generally or other reasons. We are closely monitoring the impact of the Recall on our business and the uncertainty surrounding the availability and supply of CPAP and ventilators due to the Recall. There is an equipment shortage in our industry and the Recall or other supply chain disruptions may continue to have a material adverse effect on our financial condition or results of operations, cash flows and liquidity. See "Forward-Looking Information; Risk Factor Summary" and " Part I, Item 1A. Risk Factors" in this report.
Components of Operating Results
Net Revenues. Revenues are recognized under fee-for-service and capitation
arrangements for equipment, supplies, services and other items we rent or sell
to patients. Fee-for-service is a payment model where we are paid for our
service to provide equipment, supplies and other items. Capitation is a payment
arrangement where a set amount is paid per member per month for a defined
patient population, based on a negotiated contractual rate derived using average
expected utilization of services.
Revenue generated from equipment that we rent to patients is recognized over the
noncancelable rental period and commences on delivery of the equipment to the
patients. Revenue related to sales of equipment and supplies is recognized on
the date of delivery to the patients. Capitation revenue is recognized as a
result of entering into a contract with a third party to stand ready to provide
its members certain services without regard to the actual services provided;
therefore, revenue is recognized over the period that the beneficiaries are
entitled to healthcare services. Due to the nature of our industry and the
reimbursement environment in which we operate, certain estimates are required to
record total net revenues.
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Cost of Net Revenues and Gross Margin.
Cost of Net Revenues. We incur product and supply costs, depreciation of patient equipment, home respiratory therapists costs and other costs in connection with providing our services:
? Product and supply costs are comprised primarily of the cost of supplies,
equipment and accessories provided to patients.
Patient equipment depreciation is provided using the straight-line method over
the estimated useful lives of the equipment, which range from 1 to 10 years.
Patient equipment depreciation is classified in our consolidated statements of
income within cost of net revenues as the equipment is rented to patients as
? part of our primary operations. Patient equipment is generally placed for rent;
however, it could also be sold to customers. Upon a sale, we record the
proceeds of the sale within net revenue and the cost related to the carrying
net book value as other costs within cost of net revenues in our consolidated
statements of income.
Home respiratory therapists costs are comprised primarily of employee salary
? and benefit costs or contract fees paid to respiratory therapists and other
related professionals who are deployed to service a patient.
Gross Margin. Gross margin is gross profit expressed as a percentage of net revenues. Our gross margin is impacted by Payor and product mix, fluctuations in pricing of supplies, equipment and accessories, as well as reimbursement levels.
Selling, Distribution and Administrative. Selling, distribution and
administrative ("SD&A") expenses are comprised of expenses incurred in support
of our operations and administrative functions and includes labor costs, such as
salaries, bonuses, commissions, benefits and travel-related expenses for our
employees, facilities rental costs, third-party revenue cycle management costs
and corporate support costs including finance, information technology, legal,
human resources, procurement, and other administrative costs. Distribution
expenses represents the cost incurred to coordinate and deliver products and
services to the patients. Included in distribution expenses are leasing,
maintenance, licensing and fuel costs for the vehicle fleet; salaries, benefits
and other costs related to drivers and dispatch personnel; and amounts paid to
couriers and other third-party logistics and shipping vendors.
Interest Expense and Other. Interest expense and other are comprised of expenses
incurred for interest payments made on our outstanding debt and the amortization
and write-off of deferred debt issuance costs.
Gain from Derecognition of Nonfinancial Asset. The gain from the derecognition of nonfinancial asset resulted from a contribution of software and other intellectual property to a joint venture in exchange for a 40% membership interest. See Note 1 - Summary of Significant Accounting Policies for a discussion of the equity method investment.
Income Tax Expense. Our provision for income taxes is based on expected income, permanent book/tax differences and statutory tax rates in the various jurisdictions in which we operate. Management estimates and judgments are required in determining the provision for income taxes.
Key Performance Metrics
We regularly review key performance metrics to evaluate our business, measure
our performance, identify trends in our business, prepare financial projections
and make strategic decisions.
EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex. We use
the non-GAAP financial information of earnings, before interest, taxes,
depreciation, and amortization ("EBITDA"), Adjusted EBITDA and Adjusted EBITDA
less Patient Equipment Capex as key profitability measures to evaluate the
business. Refer to the "Non-GAAP financial information" section below for
further detail, including a table reconciling each of such measures
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to net income, the most directly comparable GAAP measure. The below table sets
forth net income, EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient
Equipment Capex for the years ended
Year Ended December 31,
(in thousands) 2021 2020 2019
Net income $ 64,877 $ 46,139 $ 15,622
EBITDA $ 212,402 $ 186,378 $ 138,991
Adjusted EBITDA $ 232,035 $ 226,858 $ 173,972
Adjusted EBITDA less Patient Equipment Capex
80,523 Results of Operations
Comparison of Years Ended
The following table summarizes our consolidated results of operations:
Year Ended December 31,
(dollar amounts in thousands) 2021 2020 Change $ Change %
Net revenues $ 1,145,275 $ 1,108,717 $ 36,558 3.3 %
Cost of net revenues, including related
depreciation 341,288 328,270 13,018 4.0 %
Gross margin 803,987 780,447 23,540 3.0 %
Selling, distribution and administrative 706,633 709,299 (2,666) (0.4) %
Total costs and expenses 1,047,921 1,037,569 10,352 1.0 %
Operating income 97,354 71,148 26,206 36.8 %
Interest expense 11,781 6,308 5,473 86.8 %
Interest income (254) (498) 244 (49.0) %
Gain from derecognition of nonfinancial
asset (3,994) - (3,994) - %
Income tax expense 24,153 19,199 4,954 25.8 %
Loss from equity method investment 791 - 791 - % Net income$ 64,877 $ 46,139 $ 18,738 40.6 % Net Revenues. Net revenues for the year endedDecember 31, 2021 were$1,145.3 million compared to$1,108.7 million for the year endedDecember 31, 2020 , an increase of$36.6 million or 3.3%. The increase in net revenues for the year endedDecember 31, 2021 was primarily due to growth in OSA treatment and oxygen therapy. The increase was partially offset by reduced demand for certain products and services associated with elective medical procedures and the disruption in physician practices (such as commencement of new ventilation therapy, negative pressure wound therapy, and other equipment and services) during the COVID-19 pandemic as well as equipment shortages due to the Recall or other supply chain disruptions. The increase in net revenues was also due to higher reimbursement levels, volume from the acquisitions, and increased Medicare reimbursement rates from the CARES Act, the temporary suspension of Medicare sequestration, and oxygen budget neutrality, partially offset by reductions in commercial Payor reimbursement rates. Our core services comprise total net revenues as follows: Year Ended December 31, (dollar amounts in thousands) 2021 2020 Change $
Change % Home respiratory therapy$ 467,422 $ 453,826 $ 13,596 3.0 % OSA treatment 480,245 454,407 25,838 5.7 % NPWT 40,455 42,966 (2,511) (5.8) %
Other equipment and services 157,153 157,518 (365)
(0.2) %
Net revenues $ 1,145,275 $ 1,108,717 $ 36,558 3.3 %
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Net revenues for the year ended
Home respiratory therapy. Net revenues increased 3.0% primarily due to
increased volume of patients requiring oxygen therapy, higher reimbursement
levels, as well as increased Medicare reimbursement rates from the CARES Act,
? the temporary suspension of Medicare sequestration, and oxygen budget
neutrality. The increase was partially offset by lower ventilation therapy
revenues due to a reduction in the commencement of new services during the
COVID-19 pandemic and equipment shortages due to the Recall.
OSA treatment. Net revenues increased 5.7% primarily due to volume growth in
? OSA treatment supplies and equipment despite recent equipment shortages due to
the Recall or other supply chain disruptions. The increase was also due to
higher reimbursement levels and volume from acquisitions.
? NPWT. Net revenues decreased 5.8% due to lower allocation of capitation
revenues and reduced patient volumes.
Other equipment and services. Net revenues decreased 0.2% primarily due to
? reduced patient volume partially offset by increased volume from acquisitions
and higher reimbursement levels.
Revenues reimbursed under arrangements with Medicare and Medicaid were
approximately 21% and 1%, respectively, of total net revenues for the year ended
Cost of Net Revenues and Gross Margin.
Cost of Net Revenues. Cost of net revenues for the year endedDecember 31, 2021 were$341.3 million compared to$328.3 million for the year endedDecember 31, 2020 , an increase of$13.0 million or 4.0%. The increase in cost of net revenues for the year endedDecember 31, 2021 was primarily due to increased product and supply costs. Our cost of net revenues was as follows: Year Ended December 31, (dollar amounts in thousands) 2021 2020 Change $ Change % Product and supply costs$ 206,167 $ 192,667 $ 13,500 7.0 % Patient equipment depreciation 101,040 101,319 (279) (0.3) % Home respiratory therapists costs 16,479 16,882 (403) (2.4) % Other 17,602 17,402 200 1.1 % Total cost of net revenues$ 341,288 $ 328,270 $ 13,018 4.0 %
Product and supply costs increased primarily to support increased volume in OSA treatment supplies and due to a$3 million one-time legal recovery benefit in the prior year. Gross margin. Gross margin for the year endedDecember 31, 2021 was 70.2% compared to 70.4% for the year endedDecember 31, 2020 , a decrease of 0.2%. The gross margin decrease was driven by a$3 million one-time legal recovery in the prior year and a decrease in commercial Payor reimbursement rates. The decrease was partially offset by higher reimbursement levels and increased Medicare reimbursement rates from the CARES Act, the temporary suspension of Medicare sequestration, and oxygen budget neutrality. Selling, Distribution and Administrative. SD&A expenses for the year endedDecember 31, 2021 were$706.6 million compared to$709.3 million for the year endedDecember 31, 2020 , a decrease of$2.7 million or 0.4%. SD&A expenses for the year endedDecember 31, 2021 were 61.7% of total net revenues compared to 64.0% of total net revenues for the year endedDecember 31, 2020 . The decrease was primarily due to a$30.1 million reduction in a one-time legal settlement expense primarily due to the settlement of a series of civil investigative demands in the prior year and lower current year incentive compensation. See further discussion at Note 10 - Commitments and Contingencies in our unaudited condensed consolidated financial statements for more information. The decrease was partially offset by 68
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increased costs associated with being a public company, higher distribution expense, higher information technology costs in part due to outsourcing our datacenters, and increased variable costs associated with volume growth.
Interest Expense and Other. Interest expense and other for the year endedDecember 31, 2021 was$11.8 million compared to$6.3 million for the year endedDecember 31, 2020 , an increase of$5.5 million or 86.8% primarily due to higher outstanding debt. Gain From Derecognition of Nonfinancial Asset. Gain from derecognition of nonfinancial asset for the year endedDecember 31, 2021 was$4.0 million resulting from a contribution of software and other intellectual property to a joint venture in exchange for a 40% membership interest. See Note 1 - Summary of Significant Accounting Policies for a discussion of the equity method investment. Income Tax Expense. Income tax expense for the year endedDecember 31, 2021 was$24.2 million compared to$19.2 million for the year endedDecember 31, 2020 , an increase of$5.0 million or 25.8%. Our effective tax rate was 26.9% and 29.4% for the year endedDecember 31, 2021 and 2020, respectively. The change in income tax expense is primarily a result of increased taxable operating income. For the year endedDecember 31, 2021 , the effective tax rate differed from federal and state statutory rates primarily due to non-deductible executive compensation, and non-deductible public offering costs offset by excess tax benefits related to equity compensation. For the year endedDecember 31, 2020 the effective tax rate differed from federal and state statutory rates primarily due to non-deductible government settlements, offset by excess tax benefits related to stock-based compensation. Loss FromEquity Method Investment . Loss from equity method investment for the year endedDecember 31, 2021 was$0.8 million . For the year endedDecember 31, 2021 , our loss from equity method investment is attributable to our ownership interest inDMEscripts LLC , ("Joint Venture"). We accounted for our equity method investment in accordance with the equity method of accounting. See further discussion at Note 1 - Summary of Significant Accounting Policies in our consolidated financial statements for more information.
Comparison of Years Ended
A detailed discussion of the year-over-year results of operations for 2020 compared to 2019 can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7, of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , filed with theSEC .
Impact of Inflation and Changing Prices
We experience pricing pressures in the form of continued reductions in reimbursement rates, particularly from managed care organizations and from governmental Payors such as Medicare and Medicaid. We are also impacted by rising costs for certain inflation-sensitive operating expenses and cost of net revenues such as labor and employee benefits, facility and equipment leases, patient equipment and supplies, and vehicle fuel.
Liquidity and Capital Resources
Our principal source of liquidity is our operating cash flow, which is supplemented by extended payment terms from our suppliers and our Revolver, which provides for revolving credit of up to$100.0 million , subject to availability. Our principal liquidity requirements are labor costs, including salaries, bonuses, benefits and travel-related expenses, product and supply costs, third-party customer service, billing and collections and logistics costs, leases, patient equipment capital expenditures, and long-term debt. Our future capital expenditure requirements will depend on many factors, including our revenue growth rates. Our capital expenditures are made in advance of patients beginning service. Certain operating costs are incurred at the beginning of the equipment rental period and during initial patient set up. We may be required to seek additional equity or debt financing. In the event that additional financing is required from outside sources, we may not be able to raise it on terms acceptable to us or at all. If we are unable to raise additional capital when desired, our business, results of operations, and financial condition would be materially and adversely affected. We believe that our operating cash flow, together with our existing cash, cash equivalents, and Revolver, will continue to be sufficient to fund our operations and growth strategies for at least the next 12 months. 69
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Apria, Inc. is a holding company and our operations will be conducted entirely through our subsidiaries. Our ability to generate cash to pay applicable taxes at assumed tax rates and pay cash dividends we declare, if any, is dependent on the earnings and the receipt of funds fromApria Healthcare Group and its subsidiaries via dividends or intercompany loans. Deterioration in the financial condition, earnings or cash flow ofApria Healthcare Group and its subsidiaries for any reason could limit or impair their ability to pay such distributions. Additionally, the terms of our financing arrangements, including the TLA and the Revolver, contain covenants that may restrictApria Healthcare Group and its subsidiaries from paying such distributions, subject to certain exceptions. See " Item 1A -Risk Factors-We are a holding company with no operations of our own and we are accordingly dependent upon distributions from our subsidiaries to pay taxes and pay dividends." OnDecember 11, 2020 , we entered into the credit facility amendment to incur$260.0 million of Incremental Term Loans. Net proceeds from the Incremental Term Loans were used to fund a$200.3 million dividend payment to our common stockholders and a$9.7 million distribution to SARs holders declared and paid inDecember 2020 , with the remaining proceeds used to pay fees and expenses in connection with the credit facility amendment and for general corporate purposes. We also declared and paid a$175.0 million dividend to common stockholders and SARs holders payable inJune 2019 and a$75.0 million dividend to common stockholders inJuly 2018 . We have no current plans to pay dividends on our common stock. As permitted under the CARES Act, we have elected to defer certain portions of employer-paid FICA taxes otherwise payable fromMarch 27, 2020 toJanuary 1, 2021 , which will be paid in two equal installments onDecember 31, 2021 andDecember 31, 2022 . The first installment of$7.4 million was paid during the year endedDecember 31, 2021 . The remaining amount deferred as ofDecember 31, 2021 was$7.4 million . Cash Flow. The following table presents selected data from our consolidated statement of cash flows: Year Ended December 31, (in thousands) 2021 2020
Net cash provided by operating activities$ 211,997 $ 196,713 Net cash used in investing activities (144,208) (91,727) Net cash (used in) provided by financing activities (42,910) 15,520 Net increase in cash and cash equivalents and restricted cash 24,879 120,506 Cash, cash equivalents and restricted cash at beginning of period 195,197 74,691 Cash and cash equivalents and restricted cash at end of period$ 220,076 $ 195,197
Comparison of Years Ended
•
•
liabilities due primarily to accrued expenses and other, a decrease in cash
• provided by accounts receivable and an increase in cash used in payroll and
related taxes and benefits, offset by cash provided by accounts payable and
prepaid expenses and other assets and a decrease in cash used for legal
reserves.
Included in operating activities for the year endedDecember 31, 2020 , was cash paid for a legal settlement of$43.6 million , of which$31.9 million resulted in a reduction in net income and$11.7 million resulted in cash used for legal reserve. See further discussion in " Item 3 -Legal Proceedings-Civil Investigative Demand Issued by theUnited States Attorney's Office for the Southern District of New York" and Note 10 - Commitments and Contingencies in our audited financial statements. 70
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Net cash used in investing activities for the year endedDecember 31, 2021 was$144.2 million compared to$91.7 million for the year endedDecember 31, 2020 , an increase of$52.5 million . The primary use of funds in the year endedDecember 31, 2021 was$119.1 million to purchase patient equipment and property, equipment and improvements,$43.4 million for acquisitions and$2.1 million for issuance of related party note receivable, which was partially offset by proceeds from the sale of patient equipment and other of$17.4 million and preferred distribution from equity method investment of$3.0 million . The primary use of funds in the year endedDecember 31, 2020 was$109.1 million to purchase patient equipment and property, equipment and improvements, which was partially offset by proceeds from the sale of patient equipment and other of$17.4 million . Net cash used in financing activities for the year endedDecember 31, 2021 was$42.9 million compared to net cash provided by financing activities of$15.5 million for the year endedDecember 31, 2020 . Net cash used in financing activities for the year endedDecember 31, 2021 was primarily related to payments on long-term debt of$20.8 million , payments on asset financing of$15.2 million and payment for tax withholdings from equity-based compensation activity of$6.3 million . Net cash used in financing activities for the year endedDecember 31, 2020 primarily related to incremental borrowings on debt of$260.0 million offset by cash dividends paid to common stockholders and SARs holders of$210.0 million , payments on asset financing of$22.6 million , payments on long-term debt of$9.0 million and payments of deferred financing costs related to the TLA amendment of$3.0 million . Comparison of Years EndedDecember 31, 2020 andDecember 31, 2019 . A detailed discussion of the year-over-year cash flows for 2020 compared to 2019 can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7, of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , filed with theSEC .
Non-GAAP Financial Information.
EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex. EBITDA
is a non-GAAP measure that represents net income for the period before the
impact of interest income, interest expense, other income and expense, income
taxes, loss from equity method investment, and depreciation and amortization.
EBITDA is widely used by securities analysts, investors and other interested
parties to evaluate the profitability of companies. EBITDA eliminates potential
differences in performance caused by variations in capital structures, tax
positions, the cost and age of tangible assets and the extent to which
intangible assets are identifiable. Adjusted EBITDA is a non-GAAP measure that
represents EBITDA before certain items that impact comparison of the performance
of our business either period-over-period or with other businesses. We use
Adjusted EBITDA as a key profitability measure to assess the performance of our
business. We believe that Adjusted EBITDA should, therefore, be made available
to securities analysts, investors and other interested parties to assist in
their assessment of the performance of our business.
Adjusted EBITDA less Patient Equipment Capex is a non-GAAP measure that
represents Adjusted EBITDA less purchases of patient equipment net of
dispositions ("Patient Equipment Capex"). For purposes of this metric, Patient
Equipment Capex is measured as the value of the patient equipment received less
the net book value of dispositions of patient equipment during the accounting
period. We use Adjusted EBITDA less Patient Equipment Capex as a key
profitability measure to assess the performance of our business because our
business requires significant capital expenditures to maintain its patient
equipment fleet. Some equipment transfers title to patients' ownership after a
prescribed number of fixed monthly rental periods due to contractual
commitments. Equipment that does not transfer title wears out or oftentimes is
not recovered after a patient's use of the equipment terminates. We believe that
Adjusted EBITDA less Patient Equipment Capex should, therefore, be made
available to securities analysts, investors and other interested parties to
assist in their assessment of the performance of our business.
Below, we have provided a reconciliation of EBITDA, Adjusted EBITDA and Adjusted
EBITDA less Patient Equipment Capex to our net income, the most directly
comparable financial measure calculated and presented in accordance with GAAP.
EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex should
not be considered alternatives to net income or any other measure of financial
performance calculated and presented in accordance with GAAP. Our EBITDA,
Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex may not be
comparable to similarly titled measures of other organizations because other
organizations may not calculate
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EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex in the same manner as we calculate these measures.
Our uses of EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex have limitations as analytical tools, and you should not consider them in isolation or as a substitute for analysis of our results as reported under GAAP. Some of these limitations are:
although depreciation and amortization are non-cash charges, the assets being
? depreciated and amortized may have to be replaced in the future, EBITDA and
Adjusted EBITDA do not reflect capital expenditure requirements for such
replacements or other contractual commitments;
? EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex do not
reflect changes in, or cash requirements for, our working capital needs;
EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex do not
? reflect the interest expense or the cash requirements necessary to service
interest or principal payments on our indebtedness; and
other companies, including companies in our industry, may calculate EBITDA,
? Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex measures
differently, which reduces their usefulness as a comparative measure.
EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment Capex exclude
items that can have a significant effect on our profit or loss and should,
therefore, be used in conjunction with, not as substitutes for, profit or loss
for the period. We compensate for these limitations by separately monitoring net
income from continuing operations for the period.
The following table reconciles net income, the most directly comparable GAAP
measure, to EBITDA, Adjusted EBITDA and Adjusted EBITDA less Patient Equipment
Capex:
Year Ended December 31,
(in thousands) 2021 2020 2019
Net income $ 64,877 $ 46,139 $ 15,622 Interest (income) expense and other, net 7,533 5,810 3,666 Income tax expense 24,153 19,199 8,127 Loss from equity method investment 791
- -
Depreciation and amortization 115,048 115,230 111,576
EBITDA $ 212,402 $ 186,378 $ 138,991
Strategic transformation initiatives:
Simplify(a) - 1,159 11,775
Financial system(b) 1,466 1,846 -
Other initiatives(c) 137 465 834Stock-based compensation one-time award at IPO(d) 4,103
- -
Stock-based compensation(e) 6,046 4,839 9,024
Legal settlements(f) 1,750 28,891 12,200Merger and acquisition costs(g) 1,697
- -
Offering costs(h) 4,434 3,280 1,148
Adjusted EBITDA $ 232,035 $ 226,858 $ 173,972
Patient Equipment Capex (96,008) (92,635) (93,449)Adjusted EBITDA less Patient Equipment Capex$ 136,027 $
134,223
Simplify represents one-time advisory fees and implementation costs (a) associated with a key 2019 business transformation initiative focused on
shifting to a patient-centric platform and optimizing end-to-end customer
service.
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(b) Costs associated with the implementation of a new financial system.
Other initiatives include one-time third-party logistics advisory costs
associated with a 24-month initiative launched in
modify the branch network in order to reduce branch operating costs while (c) maintaining or improving patient service levels, one-time costs associated
with customer service initiatives, one-time costs associated with
implementation of an electronic sales, service and rental agreement and one-
time costs associated with moving the corporate headquarters in 2021.
The offering resulted in a one-time restricted stock unit ("RSUs") grant to
our Chief Financial Officer ("CFO"). The RSUs vest in tranches and are
classified as liability awards since each tranche of RSUs can be settled in
either cash or shares of our common stock at the CFO's election. The first (d) tranche of RSUs vested upon completion of the IPO and was settled in cash.
The second tranche was settled in cash during the three months ended
service period subject to continued employment and adjusted each reporting
period for changes in the fair value pro-rated for the portion of the
requisite service period rendered until settlement.
Stock-based compensation has historically been granted to certain of our
employees and non-employee directors in the form of profit interest units of
only RSUs and SARs, compensation expense for each separately vesting portion (e) of the award is recognized on a straight-line basis over the vesting period
for that portion of the award subject to continued service. For RSUs with
performance conditions, compensation expense is recognized over the requisite
service period subject to management's estimation of the probability of
vesting of such awards. Stock compensation also includes expense related to
our long-term incentive plan awards which will be settled in stock.
In
In 2021, the amount represents the final settlement amount of a claim brought
under the Private Attorneys General Act of
represents the increase in the settlement amount in relation to a series of
civil investigative demands from the
recovery in 2020. See " Item 3 -Legal Proceedings-Civil Investigative
Demand Issued by the
District of
audited financial statements for more information.
(g) Acquisition costs include one-time costs associated with the acquisition of
certain companies in 2021 and the Merger Agreement.
Offering costs represent one-time costs relating to public offerings. As we (h) did not receive any proceeds from the offerings, these costs were expensed as
incurred in SD&A expenses in the consolidated statements of income.
Accounts Receivable. Accounts receivable increased to$81.7 million as ofDecember 31, 2021 from$74.8 million as ofDecember 31, 2020 , an increase of$6.9 million . Days sales outstanding (calculated as of each period-end by dividing accounts receivable, net by the rolling average of total net revenues) were 31 days as ofDecember 31, 2021 compared to 29 days as ofDecember 31, 2020 . The increase in 2021 accounts receivable was primarily due to unbilled receivables from an acquisition. Comparison of Years EndedDecember 31, 2020 andDecember 31, 2019 . A detailed discussion of the year-over-year accounts receivable for 2020 compared to 2019 can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7, of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , filed with theSEC . Unbilled Receivables. Included in accounts receivable are earned but unbilled receivables of$19.9 million and$13.1 million as ofDecember 31, 2021 andDecember 31, 2020 , respectively. Delays, ranging from a single day to several weeks, between the date of service and billing can occur due to delays in obtaining certain required Payor-specific documentation from internal and external sources. Earned but unbilled receivables are aged from date of service and are considered in our analysis of historical performance and collectability. The increase in unbilled receivables was primarily due to billing delays associated with an acquisition. Comparison of Years EndedDecember 31, 2020 andDecember 31, 2019 . A detailed discussion of the year-over-year unbilled receivables for 2020 compared to 2019 can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7, of our Annual Report on Form 10-K for the fiscal year endedDecember 31, 2020 , filed with theSEC . Inventories and Patient Equipment. Inventories consist primarily of respiratory supplies and items used in conjunction with patient equipment. Patient equipment consists of respiratory and home medical equipment that is provided to in-home patients for the course of their care plan, normally on a rental basis, and subsequently returned to us for redistribution after cleaning and maintenance is performed. We maintain inventory and patient equipment at levels we believe will provide for the needs of our patients. 73
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Long-Term Debt. OnJune 21, 2019 , we entered into a credit agreement withCitizens Bank and a syndicate of lenders for both a TLA Facility of$150.0 million and a Revolver of$100.0 million . The Revolver replaced the prior senior secured asset-based revolving credit facility (the "ABL Facility"), Facility which provided for revolving credit financing of up to$125.0 million . Proceeds from the TLA were used to fund a$175.0 million dividend payment to common stockholders and distribution to SARs holders. OnDecember 11, 2020 , we entered into the credit facility amendment to obtain$260.0 million of Incremental Term Loans. Net proceeds from the Incremental Term Loans were used to fund a$200.3 million dividend payment to our common stockholders and a$9.7 million distribution to SARs holders declared and paid inDecember 2020 , with the remaining proceeds used to pay fees and expenses in connection with the credit facility amendment and for general corporate purposes. The credit agreement permits the interest rate to be selected at our option at either Adjusted LIBOR or alternative base rate plus their respective applicable margin. Adjusted LIBOR is the rate for Eurodollar deposits for the applicable interest period while the alternate base rate is the highest of (i) the Administrative Agent's "Prime Rate", (ii) the Federal Funds Effective Rate plus 0.50%, and (iii) one-month Adjusted LIBOR plus 1.00%. Furthermore, Adjusted LIBOR is subject to a 0.50% per annum floor and the alternative base rate is subject to a 1.50% per annum floor. Additionally, the margin applied to both the TLA and Revolver is determined based on total net leverage ratio. Total net leverage ratio is defined as net debt, which represents indebtedness minus up to$25.0 million in cash and cash equivalents over consolidated EBITDA as defined under the credit agreement. The following is a summary of the additional margin and commitment fees payable on both the TLA and available Revolver: Applicable
Margin Applicable Margin
for Adjusted for Alternative Commitment
Level Total Net Leverage Ratio LIBOR Loans Base Rate Loans Fee
I Greater than or equal to 3.00x 2.75 % 1.75 % 0.35 %
II Greater than or equal to 2.50x but less than 3.00x 2.50 % 1.50 % 0.30 %
III Greater than or equal to 1.50x but less than 2.50x 2.25 % 1.25 % 0.25 %
IV Less than 1.50x 2.00 % 1.00 % 0.20 %
The TLA matures on June 21, 2024 and we are required to make quarterly principal
payments on the TLA beginning June 30, 2020 . Upon entering into the credit
facility amendment, the amount of those quarterly principal payments was
adjusted to account for the Incremental Term Loans. We expect to refinance,
renew or replace the TLA prior to its maturity in June 2024 or to repay it with
cash from operations. The table below is a summary of the expected timing of
remaining principal repayments as of December 31, 2021 :
(in thousands)
2022 $ 36,458
2023 41,667
2024 302,083
The credit agreement encompassing the TLA and Revolver permits, subject to certain exceptions, an increase in our TLA or our Revolver, as well as the ability to incur additional indebtedness, as long as it does not exceed the total net leverage ratio of 3.00x. The credit agreement requires mandatory prepayments upon the occurrence of certain events, such as dispositions and casualty events, subject to certain exceptions. The TLA or Revolver may be voluntarily prepaid at any time without any premium or penalty.
Apria Healthcare Group's assets and equity interests ofApria Healthcare Group and all present and future wholly owned direct domestic subsidiaries ofApria Healthcare Group , with certain exceptions, are pledged as collateral for the TLA and Revolver. The credit agreement contains a financial covenant requiring us to maintain a total net leverage ratio less than 3.50x. The credit agreement also contains negative covenants that, among other things, restrict, subject to certain exceptions, the ability ofApria Healthcare Group and its restricted subsidiaries to incur additional indebtedness and guarantee indebtedness, create or incur liens, engage in mergers or consolidations, dispose of assets, pay dividends and distributions or repurchase capital stock, repay certain indebtedness, make investments and engage in certain transactions with affiliates. 74 Table of Contents As ofDecember 31, 2021 , no amounts were outstanding under the Revolver, there were$15.8 million outstanding letters of credit, and additional availability under the Revolver net of letters of credit outstanding was$84.2 million . We were in compliance with all debt covenants set forth in the TLA and Revolver as ofDecember 31, 2021 . In accordance with ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, we record origination and other expenses related to certain debt issuance costs as a direct deduction from the carrying amount of the debt liability. These expenses are deferred and amortized using the straight-line method over the stated life, which approximates the effective interest rate method. The unamortized debt issuance costs related to the ABL Facility datedNovember 2, 2018 were expensed in the year endedDecember 31, 2019 as a result of the new credit agreement. In connection with the TLA amendment for Incremental Term Loans inDecember 2020 , certain deferred financing fees related to the original TLA datedJune 21, 2019 were determined to be an extinguishment of the existing debt and an issuance of new debt. As a result, the related amounts of unamortized debt issuance costs were written off in the year endedDecember 31, 2020 . Amortization of deferred debt issuance costs are classified within interest expense in our consolidated statements of income and was$1.1 million ,$1.4 million , and$1.1 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively. Interest expense, excluding deferred debt issuance costs discussed above, was$10.7 million ,$4.9 million and$4.0 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively. Interest paid on debt totaled$10.6 million ,$5.0 million and$4.2 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively. Future interest payments associated with the TLA total$22.7 million , with$9.9 million payable within 12 months.
Leases. As of
Purchase Obligations. As ofDecember 31, 2021 , we had purchasing obligations related to amounts we expect to pay under extended payment term agreements for patient equipment of$9.2 million , with$8.6 million payable within 12 months. Additionally, we had purchasing obligations related to noncancelable telecommunication services, outsourced data center operations, and software as a service contracts of$27.7 million , with$12.9 million payable within 12 months.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of Regulation S-K during the periods presented.
Commitments and Contingencies
From time to time we enter into certain types of contracts that contingently
require us to indemnify parties against third-party claims. The contracts
primarily relate to: (i) certain asset purchase agreements, under which we may
provide customary indemnification to the seller of the business being acquired;
(ii) certain real estate leases, under which we may be required to indemnify
property owners for environmental and other liabilities, and other claims
arising from our use of the applicable premises; and (iii) certain agreements
with our officers, directors and employees, under which we may be required to
indemnify such persons for liabilities arising out of their relationship with
us. In addition, we issued certain letters of credit under our Credit Facility
as described under "Liquidity and Capital Resources-Long-Term Debt" above.
The terms of such obligations vary by contract and in most instances a specific
or maximum dollar amount is not explicitly stated therein. Generally, amounts
under these contracts cannot be reasonably estimated until a specific claim is
asserted. Consequently, no liabilities have been recorded for these obligations
on our balance sheets for any of the periods presented.
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Critical Accounting Estimates
The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of our financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition, collectability of accounts receivable, reserves related to insurance and litigation, intangible assets, stock-based compensation, income taxes and contingencies. We base these estimates on our historical experience and various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results experienced may vary materially and adversely from our estimates. To the extent there are material differences between our estimates and the actual results, our future results of operations may be affected. We consider the accounting policies that govern revenue recognition and the determination of the net realizable value of accounts receivable to be the most critical in relation to our consolidated financial statements. These policies require the most complex and subjective judgments of management. Additionally, the accounting policies related to goodwill, indefinite-lived intangible assets and long-lived assets, self-insurance reserves, and business combinations require significant judgment.
Fee-for-Service Net Revenues. Revenues are recognized under fee-for-service arrangements for equipment we rent to patients and sales of equipment, supplies and other items we sell to patients.
Rental revenues - Revenue generated from equipment that is rented to patients is
recognized over the noncancelable rental period, typically one month, and
commences on delivery of the equipment to the patients. The portfolio of lease
contracts is evaluated at lease commencement and the start of each monthly
renewal period to determine if it is reasonably certain that the monthly renewal
or purchase options would be exercised. The exercise of monthly renewal or
purchase options by a patient has historically not been reasonably certain to
occur at lease commencement or subsequent monthly renewal.
Revenues are recorded at amounts estimated to be received under reimbursement
arrangements with third-party payors, including private insurers, prepaid health
plans, Medicare, Medicaid and patients. Rental revenue, less estimated
adjustments, is recognized as earned on a straight-line basis over the
non-cancellable lease term. Rental of patient equipment is billed on a monthly
basis beginning on the date the equipment is delivered. Since deliveries can
occur on any day during a month, the amount of billings that apply to the
next month are deferred.
Our lease agreements generally contain lease and non-lease components. Non-lease
components primarily relate to supplies. The transaction price is allocated to
the separate lease and non-lease components that qualify as performance
obligations using the stand-alone selling price.
Sale revenues - Revenue related to sales of equipment and supplies is recognized
on the date of delivery as this is when control of the promised goods is
transferred to patients and is presented net of applicable sales taxes. Revenues
are recorded only to the extent it is probable that a significant reversal will
not occur in the future as amounts may include implicit price concessions under
reimbursement arrangements with third-party payors, including private insurers,
prepaid health plans, Medicare, Medicaid and patients. The sales transaction
price is determined based on contractually agreed-upon rates, adjusted for
estimates of variable consideration. The expected value method is used in
determining the variable consideration as part of determining the sales
transaction price using historical reimbursement experience, historical sales
returns, and other operating trends. Payment terms and conditions vary by
contract. The timing of revenue recognition, billing, and cash collection
generally results in billed and unbilled accounts receivable.
Capitation Revenues. Revenues are recognized under capitation arrangements with
third-party payors for services and equipment for which we stand ready to
provide to the members of these payors without regard to the actual services
provided. The stand ready obligation generally extends beyond one year. Revenue
is recognized over the month that the members are entitled to healthcare
services using the contractual rate for each covered member. The actual number
of covered members may vary each month. As a practical expedient, no disclosures
have been made related to the amount
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of variable consideration expected to be recognized in future periods under these capitation arrangements. Capitation payments are typically received in the month members are entitled to healthcare services.
Realizable Value of Accounts Receivable. Due to the nature of our industry and the reimbursement environment in which we operate, certain estimates are required to record total net revenues and accounts receivable at their net realizable values. Inherent in these estimates is the risk that they will have to be revised or updated as additional information becomes available. Specifically, the complexity of many third-party billing arrangements and the uncertainty of reimbursement amounts for certain services from certain Payors may result in adjustments to amounts originally recorded. Such adjustments are typically identified and recorded at the point of cash application, claim denial or account review. We perform periodic analyses to evaluate accounts receivable balances to ensure that recorded amounts reflect estimated net realizable value. Specifically, we consider historical realization data, accounts receivable aging trends, other operating trends, economic conditions, and the extent of contracted business and business combinations. Also considered are relevant business conditions such as governmental and managed care Payor claims processing procedures and system changes. Additionally, focused reviews of certain large and/or problematic Payors are performed. Due to continuing changes in the healthcare industry and third-party reimbursement, it is possible that our estimate could change in the near term, which could have an impact on operations and cash flows. We record a reserve for expected credit losses as part of net rental revenue adjustments in order to report rental revenue at an expected collectable amount based on the total portfolio of operating lease receivables for which collectability has been deemed probable.Goodwill , Indefinite-Lived Intangible Assets and Long-Lived Assets.Goodwill and Indefinite-lived intangible assets are not amortized but instead tested at least annually for impairment or more frequently when events or changes in circumstances indicate that the assets might be impaired. We perform the annual test for impairment for indefinite-lived intangible assets as of the first day of the fourth quarter. We first assess qualitative factors to determine whether it is more likely than not that the fair value is less than its carrying amount. If, based on a review of qualitative factors, it is more likely than not that the fair value is less than its carrying amount, we will use a quantitative approach, and calculate the fair value and compare it to its carrying amount. If the fair value exceeds the carrying amount, there is no indication of impairment. If the carrying amount exceeds the fair value, an impairment loss is recorded equal to the difference. We performed an assessment of qualitative factors and determined that no events or circumstances existed that would lead to a determination that it is more likely than not that the fair value of indefinite-lived assets were less than the carrying amount. As such, a quantitative analysis was not required to be performed. Long-lived assets, including property and equipment and purchased definite-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset or asset group may not be recoverable. Significant judgment is required in determining whether a potential indicator of impairment of long-lived assets exists and in estimating future cash flows for any necessary impairment tests. Recoverability of assets to be held and used is measured by the comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such an asset is considered to be impaired, the impairment to be recognized is measured as the amount by which the carrying amount of the asset exceeds the fair value of the asset. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. Impairment charges related to goodwill, indefinite-lived intangible assets or long-lived assets were not material for the years endedDecember 31, 2021 , 2020 and 2019.Self-Insurance . Coverage for certain employee medical claims and benefits, as well as workers' compensation, professional and general liability, and vehicle liability are self-insured. Amounts accrued for costs of workers' 77
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compensation, medical, professional and general liability, and vehicle liability
are classified as current or long-term liabilities based upon an estimate of
when the liability will ultimately be paid.
Business Combinations. Our acquisitions have been accounted for using the
purchase method of accounting under ASC 805, Business Combinations ("ASC 805").
We account for all transactions and events in which we obtain control over a
business under ASC 805 by establishing the acquisition date and recognizing the
fair value of all assets acquired and liabilities assumed. Our acquisitions have
historically been made at prices above the fair value of identifiable net
assets, resulting in goodwill.
While we use our best estimates and assumptions as part of the purchase price
allocation process to accurately value assets acquired and liabilities assumed
at the business acquisition date, the estimates and assumptions are inherently
uncertain and subject to refinement. As a result, during the purchase price
allocation period, which is generally one year from the acquisition date, we
record adjustments to the assets acquired and liabilities assumed, with the
corresponding offset to goodwill. For changes in the valuation of intangible
assets between the preliminary and final purchase price allocation, the related
amortization is adjusted in the period it occurs. Subsequent to the purchase
price allocation period, any adjustment to assets acquired or liabilities
assumed is included in operating results in the period in which the adjustment
is determined.
Accounting Pronouncements Not Yet Adopted
Recently issued accounting pronouncements that may be relevant to our operations but have not yet been adopted are outlined in Note 3 - Recent Accounting Pronouncements in our audited financial statements.
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