AVEANNA HEALTHCARE HOLDINGS INC. This Annual Report on Form 10-K contains forward-looking statements within the meaning of the PSLRA, Section 27A of the Securities Act, and Section 21E of the Exchange Act, about our expectations, beliefs, plans and intentions regarding our product development efforts, business, financial condition, results of operations, strategies and prospects. You can identify forward-looking statements by the fact that these statements do not relate to historical or current matters. Rather, forward-looking statements relate to anticipated or expected events, activities, trends or results. Because forward-looking statements relate to matters that have not yet occurred, these statements are inherently subject to risks and uncertainties that could cause our actual results to differ materially from any future results expressed or implied by the forward-looking statements. Many factors could cause our actual activities or results to differ materially from the activities and results anticipated in forward-looking statements. These factors include those contained in "Item 1A - Risk Factors" of this Annual Report on Form 10-K. Forward -looking statements reflect our views only as of the date they are made. We do not undertake any obligation to update forward-looking statements except as required by applicable law. We intend that all forward-looking statements be subject to the safe harbor provisions of PSLRA. Our fiscal year ends on the Saturday that is closest toDecember 31 of a given year, resulting in either a 52-week or 53-week fiscal year. Our "fiscal year 2022" refers to the 52-week fiscal year ended onDecember 31, 2022 . Our "fiscal year 2021" refers to the 53-week fiscal year ended onJanuary 1, 2022 . Our "fiscal year 2020" refers to the 52-week fiscal year ended onJanuary 2, 2021 .
Overview
We are a leading, diversified home care platform focused on providing care to medically complex, high-cost patient populations. We directly address the most pressing challenges facing theU.S. healthcare system by providing safe, high-quality care in the home, the lower cost care setting preferred by patients. Our patient-centered care delivery platform is designed to improve the quality of care our patients receive, which allows them to remain in their homes and minimizes the overutilization of high-cost care settings such as hospitals. Our clinical model is led by our caregivers, primarily skilled nurses,who provide specialized care to address the complex needs of each patient we serve across the full range of patient populations: newborns, children, adults and seniors. We have invested significantly in our platform to bring together best-in-class talent at all levels of the organization and support such talent with industry leading training, clinical programs, infrastructure and technology-enabled systems, which are increasingly essential in an evolving healthcare industry. We believe our platform creates sustainable competitive advantages that support our ability to continue driving rapid growth, both organically and through acquisitions, and positions us as the partner of choice for the patients we serve. 54 --------------------------------------------------------------------------------
Segments
We deliver our services to patients through three segments: Private Duty
Services ("PDS");
The following table summarizes the revenues generated by each of our segments
for the fiscal years ended
(dollars in thousands) Consolidated PDS HHH
MS
For the fiscal year ended December 31, 2022$ 1,787,645 $ 1,415,105 $ 232,584 $ 139,956 Percentage of consolidated revenue 79 % 13 % 8 % For the fiscal year ended January 1, 2022$ 1,678,618 $ 1,358,116 $ 177,272 $ 143,230 Percentage of consolidated revenue 80 % 11 % 9 % PDS Segment Private Duty Services predominantly includes private duty nursing ("PDN") services, as well as pediatric therapy services. Our PDN patients typically enter our service as children, as our most significant referral sources for new patients are children's hospitals. It is common for our PDN patients to continue to receive our services into adulthood, as approximately 30% of our PDN patients are over the age of 18. Our PDN services involve the provision of clinical and non-clinical hourly care to patients in their homes, which is the preferred setting for patient care. PDN services typically last four to 24 hours a day, provided by our registered nurses, licensed practical nurses, home health aides, and other non-clinical caregiverswho are focused on providing high-quality short-term and long-term clinical care to medically fragile children and adults with a wide variety of serious illnesses and conditions. Patientswho typically qualify for our PDN services include those with the following conditions:
•
Tracheotomies or ventilator dependence; • Dependence on continuous nutritional feeding through a "G-tube" or "NG-tube"; • Dependence on intravenous nutrition; • Oxygen-dependence in conjunction with other medical needs; and • Complex medical needs such as frequent seizures.
Our PDN services include:
•
In-home skilled nursing services to medically fragile children and adults;
•
Nursing services in school settings in which our caregivers accompany patients
to school;
•
Services to patients in our Pediatric Day Healthcare Centers ("PDHC"); and
•
Non-clinical care, including programs such as employer of record support
services and personal care services.
Through our pediatric therapy services, we provide a valuable multidisciplinary
approach that we believe serves all of a child's therapy needs. We provide both
in-clinic and home-based therapy services to our patients. Our therapy services
include physical, occupational and speech services. We regularly collaborate
with physicians and other community healthcare providers, which allows us to
provide more comprehensive care.
HHH Segment
OurHome Health and Hospice segment predominantly includes home health services, as well as hospice and specialty program services. Our HHH patients typically enter our service as seniors, and our most significant referral sources for new patients are hospitals, physicians and long-term care facilities. Our home health services involve the provision of in-home services to our patients by our clinicians, including nurses, therapists, social workers and home health aides. Our caregivers work with our patients' physicians to deliver a personalized plan of care to our patients in their homes. Home healthcare can help our patients recover after hospitalization or surgery and assist patients in managing chronic illnesses. We also help our patients manage their medications. Through our care, we help our patients recover more fully in the comfort 55 -------------------------------------------------------------------------------- of their own homes, while remaining as independent as possible. Our home health services include: in-home skilled nursing services; physical, occupational and speech therapy; medical social services and aide services. Our hospice services involve a supportive philosophy and concept of care for those nearing the end of life. Our hospice care is a positive, empowering form of care designed to provide comfort and support to our patients and their families when a life-limiting illness no longer responds to cure-oriented treatments. The goal of hospice is to neither prolong life nor hasten death, but to help our patients live as dignified and pain-free as possible. Our hospice care is provided by a team of specially trained professionals in a variety of living situations, including at home, at the hospital, a nursing home, or an assisted living facility. MS Segment Through our Medical Solutions segment, we offer a comprehensive line of enteral nutrition supplies and other products to adults and children, delivered on a periodic or as-needed basis. We provide our patients with access to one of the largest selections of enteral formulas, supplies and pumps in our industry, with more than 300 nutritional formulas available. Our registered nurses, registered dietitians and customer service technicians support our patients 24 hours per day, 365 days per year, in-hospital, at-home, or remotely to help ensure that our patients have the best nutrition assessments, change order reviews and formula selection expertise.
Acquisitions and other Factors Affecting Results of Operations and Comparability
Acquisition-related Activities
OnApril 16, 2021 , we acquiredDoctor's Choice Holdings, LLC ("Doctor's Choice"), which provides home health services in the state ofFlorida . Doctor's Choice generated revenues in 2021 prior to being acquired by us of$22.9 million and$51.6 million after being acquired by us. OnDecember 10, 2021 , we acquiredComfort Care Home Health Services, LLC , including its subsidiaries ("Comfort Care"), which provides home health and hospice services in the states ofAlabama andTennessee . Comfort Care generated revenues in 2021 prior to being acquired by us of$94.4 million and$6.0 million after being acquired by us. Collectively, we refer to the acquisitions of Doctor's Choice and Comfort Care as the "2021 HHH Acquisitions". We believe we have built a home health and hospice program of significant size and scale, focused on delivering high-quality patient care in attractive geographies. OnNovember 30, 2021 , we acquired Accredited Nursing Services ("Accredited"), a provider of primarily non-clinical services in the state ofCalifornia . Accredited generated revenues in fiscal year 2021 prior to being acquired by us of$107.1 million and$8.9 million after being acquired by us. We report the results of Accredited in our PDS segment. Total revenues generated by the 2021 HHH Acquisitions and Accredited in fiscal year 2021, including the periods in fiscal year 2021 prior to being acquired by us, were$290.9 million .
COVID-19 Pandemic Impact on our Business
InMarch 2020 , theWorld Health Organization declared COVID-19 a pandemic. Since that time, we have monitored the impact of COVID-19 on our caregivers and support personnel, our patients and their families, and our referral sources. We adapted our operations as necessary to best protect our people and serve our patients and our communities, and also invested in technology and equipment that allows support personnel to provide, on a remote basis, seamless functionality and support to our clinicianswho care for our patients. With the onset of the COVID-19 pandemic inMarch 2020 , we began incurring incremental costs of patient services necessary to maintain our clinical workforce in the COVID-19 environment, including costs for additional PPE, hero and hazard pay, COVID-19 relief pay, incremental overtime, and various incentives to attract and retain caregivers. We recorded an impairment charge in the fourth quarter of fiscal year 2021 in four of the reporting units within our PDS segment as a result of the pandemic's impact on our business. Our operations were particularly impacted in the fourth quarter of 2021 and the first quarter of 2022 due to the Omicron variant and the attendant pressures on our clinical workforce. The direct effects on our business of the pandemic have significantly lessened since the first quarter of 2022, as a result of declining infection rates and the normalization of living with COVID-19 following the increase in accessibility to COVID-19 vaccines and antiviral treatments, as well as the upcoming expiration of the Public Health Emergency associated with COVID-19 onMay 11, 2023 . Any future resurgence in COVID-19 or new variants of the virus, and the severity and duration thereof, remain uncertain, however, and potential negative impacts of such a resurgence on our results of operations include, without limitation: lower volumes due to interruption 56 -------------------------------------------------------------------------------- of the operations of our referral sources; lower volumes due to lack of availability of caregivers in the workforce; the unwillingness of patients to accept services in their homes; lower revenue or higher salary and wage expense due to increased market rate expectations of caregivers in order to work in hazardous conditions where COVID-19 is prevalent; increased workers compensation insurance and leave costs; increased costs to comply with various federal, state and local vaccine or leave mandates, and any future spikes in PPE supply costs.
CARES Act
In response to COVID-19, the
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Provider Relief Fund ("PRF"): Beginning inApril 2020 , funds were distributed to health care providerswho provide or provided diagnoses, testing, or care for individuals with possible or actual cases of COVID-19. In fiscal year 2020, we received PRF payments from HHS totaling$25.1 million . OnMarch 5, 2021 , we repaid these PRF payments in full. InDecember 2021 , we also received PRF payments from HHS totaling$2.5 million , which we repaid in full inDecember 2021 .
•
State Sponsored Relief Funds: In fiscal year 2020, we received$4.8 million of stimulus funds from the Commonwealth ofPennsylvania Department of Human Services ("Pennsylvania DHS"), which we did not apply for or request. We did not receive stimulus funds from any individual state other thanPennsylvania . We recognized$0.5 million of income related to these funds in fiscal year 2020. OnFebruary 4, 2021 , we repaid the remaining$4.3 million of direct stimulus funds to Pennsylvania DHS.
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Deferred payment of the employer portion of social security taxes: We were permitted to defer payments of the employer portion of social security taxes in fiscal year 2020, which were payable in 50% increments, with the first 50% due byDecember 31, 2021 and the second 50% due byDecember 31, 2022 . We did not defer any payroll taxes afterDecember 31, 2020 . InDecember 2021 , we repaid$25.9 million of deferred payroll taxes with the remaining deferred payments of$25.5 million recorded in the current portion of deferred payroll taxes in the consolidated balance sheets atJanuary 1, 2022 . We repaid the remaining$25.5 million of deferred social security payroll taxes inDecember 2022 .
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Medicare Advances: Certain of the home health and hospice companies we have acquired received advance payments from CMS inApril 2020 , pursuant to the expansion of the Accelerated Payments Program provided for in the CARES Act. These advances became repayable beginning one year from the date on which the accelerated advance was issued. The repayments occurred via offsets by Medicare to current payments otherwise due from Medicare at a rate of 25% for the first eleven months. After the eleven months end, payments were recouped at a rate of 50% for another six months, after which any remaining balance became due. Gross advances received by acquired companies inApril 2020 totaled$15.7 million . We began repaying the gross amount of the advances, via the offset mechanism described above, during the second quarter of fiscal year 2021, and had repaid all such advances as ofJuly 2, 2022 . We repaid$12.2 million of such advances in fiscal year 2021 and$3.5 million during the six months endedJuly 2, 2022 .
•
Temporary Suspension of Medicare Sequestration: The Budget Control Act of 2011 requires a mandatory, across the board reduction in federal spending, called a sequestration. Medicare fee-for-service claims with dates of service or dates of discharge on or afterApril 1, 2013 incur a 2.0% reduction in Medicare payments. All Medicare rate payments and settlements are subject to this mandatory reduction, which will continue to remain in place through at least 2023, unlessCongress takes further action. In response to COVID-19, the CARES Act temporarily suspended the automatic 2.0% reduction of Medicare claim reimbursements for the period fromMay 1, 2020 throughDecember 31, 2021 . InDecember 2021 ,Congress extended the suspension of the automatic 2.0% reduction throughMarch 2022 and reduced the sequestration adjustment to 1.0% fromApril 1, 2022 throughJune 30, 2022 , with the full 2.0% reduction for sequestration resuming thereafter.
American Rescue Plan Act ("ARPA")
OnMarch 11, 2021 President Biden signed ARPA into law. ARPA is a federal stimulus bill designed to aid public health and economic recovery from the COVID-19 pandemic. ARPA includes$350 billion in emergency funding for state, local, territorial and tribal governments, known as the Coronavirus State and Local Fiscal Recovery Funds ("ARPA Recovery Funds"). States must obligate the ARPA Recovery Funds byDecember 31, 2024 and spend such funds byDecember 31, 2026 . Usage of the ARPA Recovery Funds is subject to the requirements specified in theUnited States Treasury Department's Final Rule issued onJanuary 6, 2022 . 57 -------------------------------------------------------------------------------- The Final Rule provides states with substantial flexibility in utilizing ARPA Relief Funds, including to support public health expenditures such as vaccination programs and testing, and PPE purchases, as well as providing premium pay for essential workers, including those in home-care settings, among many other things. States may not use ARPA Recovery Funds to fund tax cuts, fund budget deficits, or to support public employee pensions. During the year endedDecember 31, 2022 we received$6.3 million of ARPA Recovery Funds from various states,$5.0 million of which we recognized as revenue in our consolidated statements of operations, and$1.3 million of which was recorded in other current liabilities on our consolidated balance sheet atDecember 31, 2022 . We may receive additional ARPA Recovery Funds in the future, however we cannot estimate the amount or timing of any future receipts. These funds are not subject to repayment, provided we are able to attest and comply with any terms and conditions of such funding, as applicable. If we are unable to attest to attest or comply with current or future terms and conditions, our ability to retain some or all of the ARPA Recovery Funds received may be impacted, which is unknown at this time. Important Operating Metrics
We review the following important metrics on a segment basis and not on a consolidated basis:
PDS Segment and MS Segment Operating Metrics
Volume
Volume represents PDS hours of care provided and MS unique patients served, which is how we measure the amount of our patient services provided. We review the number of hours of PDS care provided on a weekly basis and the number of MS unique patients served on a weekly basis. We believe volume is an important metric because it helps us understand how the Company is growing in each of these segments through strategic planning and acquisitions. We also use this metric to inform strategic decision making in determining opportunities for growth.
Revenue Rate
For our PDS and MS segments, revenue rate is calculated as revenue divided by PDS hours of care provided or the number of MS unique patients served, respectively. We believe revenue rate is an important metric because it represents the amount of revenue we receive per PDS hour of patient service or per individual MS patient transaction and helps management assess the amount of fees that we are able to bill for our services. Management uses this metric to assess how effectively we optimize reimbursement rates.
Cost of Revenue Rate
For our PDS and MS segments, cost of revenue rate is calculated as cost of revenue divided by PDS hours of care provided or the number of unique patients served, respectively. We believe cost of revenue rate is an important metric because it helps us understand the cost per PDS hour of patient service or per individual MS patient transaction. Management uses this metric to understand how effectively we manage labor and product costs.
Spread Rate
For our PDS and MS segments, spread rate represents the difference between the respective revenue rates and cost of revenue rates. Spread rate is an important metric because it helps us better understand the margins being recognized per PDS hour of patient service or per individual MS patient transaction. Management uses this metric to assess how successful we have been in optimizing reimbursement rates, managing labor and product costs, and assessing opportunities for growth.
HHH Segment Operating Metrics
Home health total admissions represents the number of new patients
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reimbursement structure, separating them into home health episodic admissions
and fee-for-service admissions (other admissions), which allows us to better
understand the payer mix of our home health business.
Home Health Total Episodes
Home health total episodes represents the number of episodic admissions and episodic recertifications to capture patientswho have either started to receive services or have been recertified for another episode of care. Management reviews home health total episodes on a monthly basis to understand the volume of patientswho were authorized to receive care during the month.
Home Health Revenue Per Completed Episode
Home health revenue per completed episode is calculated by dividing total payments received from completed episodes by the number of completed episodes during the period. Episodic payments are determined by multiple factors including type of referral source, patient diagnoses, and utilization. Management tracks home health revenue per completed episode over time to evaluate both the clinical and financial profile of the business in a single metric. Results of Operations
Fiscal Year Ended
The following table summarizes our consolidated results of operations for the
fiscal years indicated:
For the fiscal years ended
December 31,
(dollars in thousands) 2022 % of Revenue January 1, 2022 % of Revenue Change % Change
Revenue $ 1,787,645 100.0 % $ 1,678,618 100.0 % $ 109,027 6.5 %
Cost of revenue, excluding
depreciation and amortization 1,234,418 69.1 % 1,136,214 67.7 % 98,204 8.6 %
Gross margin $ 553,227 30.9 % $ 542,404 32.3 % $ 10,823 2.0 %
Branch and regional
administrative expenses 357,230 20.0 % 297,381 17.7 % 59,849 20.1 %
Field contribution $ 195,997 11.0 % $ 245,023 14.6 % $ (49,026 ) -20.0 %
Corporate expenses 137,864 7.7 % 130,387 7.8 % 7,477 5.7 %
Goodwill impairment 675,346 37.8 % 117,702 7.0 % 557,644 473.8 %
Depreciation and amortization 21,313 1.2 % 20,550 1.2 % 763 3.7 %
Acquisition-related costs 99 0.0 % 12,832 0.8 % (12,733 ) -99.2 %
Other operating expense
(income) 3,651 0.2 % (337 ) 0.0 % 3,988 NM
Operating loss $ (642,276 ) -35.9 % $ (36,111 ) -2.2 % $ (606,165 ) NM
Interest expense, net (107,041 ) (68,677 ) (38,364 ) 55.9 %
Loss on debt extinguishment - (13,702 ) 13,702 -100.0 %
Other income 85,503 4,914 80,589 NM
Income tax benefit (expense) 1,780 (3,468 ) 5,248 -151.3 %
Net loss $ (662,034 ) $ (117,044 ) $ (544,990 ) 465.6 %
The following table summarizes our consolidated key performance measures, including Field contribution and Field contribution margin, which are non-GAAP measures (see "Non-GAAP Financial Measures" below), for the fiscal years indicated:
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For the fiscal years ended
(dollars in thousands) December 31, 2022 January 1, 2022 Change % Change
Revenue $ 1,787,645 $ 1,678,618 $ 109,027 6.5 %
Cost of revenue, excluding
depreciation and amortization 1,234,418 1,136,214 98,204 8.6 %
Gross margin $ 553,227 $ 542,404 $ 10,823 2.0 %
Gross margin percentage 30.9 % 32.3 %
Branch and regional administrative
expenses 357,230 297,381 59,849 20.1 %
Field contribution $ 195,997 $ 245,023 $ (49,026 ) -20.0 %
Field contribution margin 11.0 % 14.6 %
Corporate expenses $ 137,864 $ 130,387 $ 7,477 5.7 %
As a percentage of revenue 7.7 % 7.8 %
Operating loss $ (642,276 ) $ (36,111 ) $ (606,165 ) NM
As a percentage of revenue -35.9 % -2.2 %
The following tables summarize our key performance measures by segment for the
fiscal years indicated:
PDS
For the fiscal years ended
December 31,
(dollars and hours in thousands) 2022 January 1, 2022 Change % Change
Revenue $ 1,415,105 $ 1,358,116 $ 56,989 4.2 %
Cost of revenue, excluding
depreciation and amortization 1,022,640 963,257 59,383 6.2 %
Gross margin $ 392,465 $ 394,859 $ (2,394 ) -0.6 %
Gross margin percentage 27.7 % 29.1 % -1.4 % (4)
Hours 38,461 37,867 594 1.6 %
Revenue rate $ 36.79 $ 35.87 $ 0.92 2.6 % (1)
Cost of revenue rate $ 26.59 $ 25.44 $ 1.15 4.6 % (2)
Spread rate $ 10.20 $ 10.43 $ (0.23 ) -2.2 % (3)
HHH
For the fiscal years ended
(dollars and admissions/episodes in December 31,
thousands) 2022 January 1, 2022 Change % Change
Revenue $ 232,584 $ 177,272 $ 55,312 31.2 %
Cost of revenue, excluding
depreciation and amortization 130,721 93,557 37,164 39.7 %
Gross margin $ 101,863 $ 83,715 $ 18,148 21.7 %
Gross margin percentage 43.8 % 47.2 % -3.4 % (4)
Home health total admissions (5) 49.0 39.6 9.4 23.7 %
Home health episodic admissions (6) 30.2 24.9 5.3 21.3 %
Home health total episodes (7) 48.5 37.5 11.0 29.3 %
Home health revenue per completed
episode (8) $ 2,987 $ 2,917 $ 70 2.4 %
MS
For the fiscal years ended
December 31,
(dollars and UPS in thousands) 2022 January 1, 2022 Change % Change
Revenue $ 139,956 $ 143,230 $ (3,274 ) -2.3 %
Cost of revenue, excluding
depreciation and amortization 81,057 79,400 1,657 2.1 %
Gross margin $ 58,899 $ 63,830 $ (4,931 ) -7.7 %
Gross margin percentage 42.1 % 44.6 % -2.5 % (4)
Unique patients served ("UPS") 320 306 14 4.6 %
Revenue rate $ 437.36 $ 468.07 $ (30.71 ) -6.9 % (1)
Cost of revenue rate $ 253.30 $ 259.48 $ (6.18 ) -2.5 % (2)
Spread rate $ 184.06 $ 208.59 $ (24.53 ) -12.3 % (3)
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1.
Represents the period over period change in revenue rate, plus the change in revenue rate attributable to the change in volume. 2. Represents the period over period change in cost of patient services rate, plus the change in cost of patient services rate attributable to the change in volume. 3. Represents the period over period change in spread rate, plus the change in spread rate attributable to the change in volume. 4. Represents the change in margin percentage year over year. 5. Represents home health episodic and fee-for-service admissions. 6. Represents home health episodic admissions. 7. Represents episodic admissions and recertifications. 8. Represents Medicare revenue per completed episode. The following discussion of our results of operations should be read in conjunction with the foregoing tables summarizing our consolidated results of operations and key performance measures, as well as our audited consolidated financial statements contained elsewhere in this Annual Report on Form 10-K. Summary Operating Results Operating Loss
Operating loss was
The operating loss for fiscal year 2022 primarily resulted from an increase in non-cash impairment charges of$557.6 million and a$49.0 million , or 20.0%, decrease in Field contribution as compared to fiscal year 2021. The$49.0 million decrease in Field contribution resulted from a$109.0 million , or 6.5%, increase in consolidated revenue, offset by a 3.6% decline in Field contribution margin to 11.0% for fiscal year 2022 from 14.6% for fiscal year 2021. The primary drivers of our lower Field contribution margin over the comparable fiscal year periods were a decrease in our gross margin percentage from 32.3% to 30.9% and a 2.3% increase in branch and regional administrative expense as a percentage of revenue to 20.0% for fiscal year 2022 from 17.7% for fiscal year 2021. Net Loss
The
•
the previously discussed$606.2 million increase in operating loss; and • a$38.4 million increase in interest expense, net of interest income; offset by • an aggregate$81.6 million increase in valuation gains on interest rate derivatives and decrease in net settlements incurred with interest rate swap counterparties over the comparable periods; • the absence of a$13.7 million loss on debt extinguishment incurred in the fiscal year endedJanuary 1, 2022 ; and • a$5.2 million net decrease in income tax expense.
Revenue
Revenue was
•
a$57.0 million , or 4.2% increase in PDS revenue; • a$55.3 million , or 31.2%, increase in HHH revenue; offset by • a$3.3 million , or 2.3%, decrease in MS revenue. Our PDS segment revenue growth of$57.0 million , or 4.2%, for the fiscal year endedDecember 31, 2022 was attributable to an increase in revenue rate of 2.6% and an increase in volume of 1.6%. The increase in PDS volume on a year over year basis was attributable to the following items:
•
an increase in volumes for a full year of operations contributed by the Accredited acquisition completed inDecember 2021 ; net of • a volume decline in our PDS businesses due to continued challenges in the labor markets including both shortages in workforce and inflationary wage pressures which constrained our ability to recruit and retain caregivers to meet existing patient demand. 61 -------------------------------------------------------------------------------- The 2.6% increase in PDS revenue rate for the fiscal year endedDecember 31, 2022 , as compared to the fiscal year endedJanuary 1, 2022 , resulted from reimbursement rate increases issued by various state Medicaid programs and managed Medicaid payers, partially offset by the growth in our non-clinical business contributed by the Accredited acquisition completed inNovember 2021 , which has lower average revenue rates per hour than the comparable rates in the balance of our PDS businesses. Revenue rate also benefited in fiscal year 2022 from recognition of$5.0 million of ARPA Recovery Funds and lower implicit price concessions as compared to the prior year period. Our HHH segment revenue growth of$55.3 million , or 31.2%, for the fiscal year endedDecember 31, 2022 resulted from incremental volume contributed by our 2021 HHH Acquisitions completed during the second and fourth fiscal quarters of 2021, partially offset by a decline in overall HHH volumes over the comparable fiscal year periods. HHH revenue was also negatively impacted in fiscal year 2022 by an increase in implicit price concessions in connection with the transition from and implementation of legacy and new electronic medical record, billing and collection systems, as well as the reinstatement of Medicare sequestration. Our MS segment revenue decline of$3.3 million , or 2.3%, for the fiscal year endedDecember 31, 2022 , as compared to the fiscal year endedJanuary 1, 2022 , was attributable to 4.6% volume growth combined with a decrease in revenue rate of 6.9%. The decrease in revenue rate was primarily attributable to payer rate decreases that became effective inSeptember 2021 and the impact of certain product recalls on order fulfillment during the fiscal year endedDecember 31, 2022 .
Cost of Revenue, Excluding Depreciation and Amortization
Cost of revenue, excluding depreciation and amortization, was$1,234.4 million for the fiscal year endedDecember 31, 2022 , as compared to$1,136.2 million for the fiscal year endedJanuary 1, 2022 , an increase of$98.2 million , or 8.6%. This increase resulted from the following segment activity:
•
a$59.4 million , or 6.2%, increase in PDS cost of revenue; • a$37.2 million , or 39.7%, increase in HHH cost of revenue; and • a$1.7 million , or 2.1%, increase in MS cost of revenue. The 6.2% increase in PDS cost of revenue for the fiscal year endedDecember 31, 2022 resulted from the previously described 1.6% increase in PDS volume for the fiscal year endedJanuary 1, 2022 and a 4.6% increase in PDS cost of revenue rate. The 4.6% increase in cost of revenue rate primarily resulted from higher caregiver labor costs including pass-through of reimbursement rate increases received by the Company during the fiscal year endedDecember 31, 2022 , and$12.2 million higher general and professional liability expense associated with certain accrued legal settlements; net of approximately$11.7 million lower caregiver compensation costs compared to the prior fiscal resulting from the reduced impact of the COVID-19 pandemic. The 39.7% increase in HHH cost of revenue for the fiscal year endedDecember 31, 2022 was driven by the increased volumes associated with the 2021 HHH Acquisitions completed during the second and fourth fiscal quarters of 2021, in addition to general wage pressures and higher overall caregiver labor costs in relation to fiscal year 2022 volumes. The 2.1% increase in MS cost of revenue for the fiscal year endedDecember 31, 2022 was driven by the previously described 4.6% growth in MS volumes during fiscal year 2022, net of a 2.5% decrease in cost of revenue rate primarily due to lower order fulfillment perUPS and shifts in product mix.
Gross Margin and Gross Margin Percentage
Gross margin was$553.2 million , or 30.9% of revenue, for the fiscal year endedDecember 31, 2022 , as compared to$542.4 million , or 32.3% of revenue, for the fiscal year endedJanuary 1, 2022 . Gross margin increased$10.8 million , or 2.0%, year over year. The 1.4% decrease in gross margin percentage for the fiscal year endedDecember 31, 2022 resulted from the combined changes in our revenue rates and cost of revenue rates in our PDS and MS segments, which we refer to as the change in our spread rate, and the change in gross margin percentage in our HHH segment, as follows:
•
a 2.2% decrease in PDS spread rate from$10.43 to$10.20 , driven by the 2.6% increase in PDS revenue rate, net of the 4.6% increase in PDS cost of revenue rate; • a 12.3% decrease in MS spread rate from$208.59 to$184.06 , driven by the 6.9% decrease in MS revenue rate, net of the 2.5% decrease in MS cost of revenue rate; and • our HHH segment, in which gross margin percentage decreased by 3.4%. 62 --------------------------------------------------------------------------------
Branch and Regional Administrative Expenses
Branch and regional administrative expenses were
The 20.1% increase in branch and regional administrative expenses exceeded revenue growth of 6.5% for the fiscal year endedDecember 31, 2022 , as compared to the fiscal year endedJanuary 1, 2022 . The$59.8 million increase in branch and regional administrative expenses resulted from incremental branch and regional costs to support our 2021 HHH Acquisitions and Accredited acquisition. In the third quarter of fiscal year 2022, we began restructuring our branch and regional administrative footprint to appropriately size our resources to current volumes and we continue to focus on these initiatives in 2023. As a result, branch and regional administrative expenses for fiscal year 2022 included severance expenses related to headcount reductions and facility costs associated with the closure of certain office locations.
Field Contribution and Field Contribution Margin
Field contribution was$196.0 million , or 11.0% of revenue, for the fiscal year endedDecember 31, 2022 as compared to$245.0 million , or 14.6% of revenue, for the fiscal year endedJanuary 1, 2022 . Field contribution decreased$49.0 million , or 20.0%, for the fiscal year endedDecember 31, 2022 , as compared to the fiscal year endedJanuary 1, 2022 . The 3.6% decrease in Field contribution margin for the fiscal year endedDecember 31, 2022 resulted from the following:
•
the 1.4% decrease in gross margin percentage in the fiscal year endedDecember 31, 2022 , as compared to the fiscal year endedJanuary 1, 2022 ; net of • the 2.3% increase in branch and regional administrative expenses as a percentage of revenue for the fiscal year endedDecember 31, 2022 , as compared to the fiscal year endedJanuary 1, 2022 .
Field Contribution and Field Contribution Margin are non-GAAP financial measures. See "Non-GAAP Financial Measures" below.
Corporate Expenses
Corporate expenses as a percentage of revenue for the fiscal years ended
For the fiscal years ended
December 31, 2022 January 1, 2022
(dollars in thousands) Amount % of Revenue Amount % of Revenue
Revenue $ 1,787,645 $ 1,678,618
Corporate expense components:
Compensation and benefits $ 67,196 3.8 % $ 62,749 3.7 %
Non-cash share-based compensation 11,103 0.6 % 11,561 0.7 %
Professional services 32,438 1.8 % 32,004 1.9 %
Rent and facilities expense 12,501 0.7 % 13,088 0.8 %
Office and administrative 3,478 0.2 % 2,853 0.2 %
Other 11,148 0.6 % 8,132 0.5 %
Total corporate expenses $ 137,864 7.7 % $ 130,387 7.8 %
Corporate expenses were $137.9 million , or 7.7% of revenue, for the fiscal year
ended December 31, 2022 , as compared to $130.4 million , or 7.8% of revenue, for
the fiscal year ended January 1, 2022 . The $7.5 million or 5.7% increase in year
over year corporate expenses resulted primarily from:
•
incremental compensation and benefits necessary to support the operations and integration process for the companies we acquired in fiscal year 2021, net of lower incentive costs; and • incremental compensation and benefits associated with certain corporate restructuring activities, including compensation, severance and related benefits costs associated with the executive transition plan effective onDecember 31, 2022 . Goodwill Impairment 63
--------------------------------------------------------------------------------Goodwill impairment was$675.3 million for the fiscal year endedDecember 31, 2022 , compared to$117.7 million for the fiscal year endedJanuary 1, 2022 , an increase of$557.6 million . During fiscal year 2022, we recorded two impairment charges as a result of continuing inflationary and overall cost pressures, which had the effect of constraining patient volume growth in relation to costs across most of our businesses. We performed an interim impairment assessment as ofJuly 2, 2022 and based on that assessment, we determined that the carrying value of five of our six reporting units across our three segments exceeded their respective fair values and accordingly recorded an aggregate goodwill impairment charge of$470.2 million for the three-month period endedJuly 2, 2022 . During our annual goodwill impairment test during the fourth quarter of fiscal year 2022, we determined that the carrying value of five of our six reporting units across our three segments exceeded their respective fair values and accordingly recorded an aggregate goodwill impairment charge of$205.1 million for the three-month period endedDecember 31, 2022 .
Depreciation and Amortization
Depreciation and amortization was$21.3 million for the fiscal year endedDecember 31, 2022 , compared to$20.6 million for the fiscal year endedJanuary 1, 2022 , an increase of$0.8 million , or 3.7%. The$0.8 million increase primarily resulted from incremental depreciation and amortization associated with assets acquired in connection with the acquisitions of Comfort Care and Accredited, completed in the fourth quarter of fiscal year 2021.
Acquisition-related Costs
Acquisition-related costs were$0.1 million for the fiscal year endedDecember 31, 2022 , compared to$12.8 million for the fiscal year endedJanuary 1, 2022 . Acquisition-related costs in fiscal year 2021 were primarily attributable to the 2021 HHH Acquisitions and the Accredited acquisition completed in the fourth quarter of fiscal year 2021, versus nominal acquisition activity in fiscal year 2022.
Other Operating Expense (Income)
Other operating expenses were$3.7 million for the fiscal year endedDecember 31, 2022 , compared to operating income of$0.3 million . Other operating expenses in fiscal year 2022 were primarily related to the impairment of licenses associated with a legacy billing and collection system.
Interest Expense, net of Interest Income
Interest expense, net of interest income was$107.0 million for the fiscal year endedDecember 31, 2022 , compared to$68.7 million for the fiscal year endedJanuary 1, 2022 , an increase of$38.4 million , or 55.9%. Interest expense was primarily impacted in fiscal year 2022 by significant increases in LIBOR rates, largely because theFederal Reserve Board significantly increased theU.S. federal funds rate in 2022. Interest expense also was impacted by the$60.0 million borrowing under the Delayed Draw Term Loan Facility (as defined below) inAugust 2022 and additional borrowing under the Securitization Facility in fiscal year 2022 of$20.0 million . Additionally, the full year effect of the acquisition financing for the Accredited and Comfort Care acquisitions inDecember 2021 resulted in higher comparative interest expense, as discussed below in the Liquidity and Capital Resources section.
Loss on Debt Extinguishment
Loss on debt extinguishment was$13.7 million for the fiscal year endedJanuary 1, 2022 . Such costs in 2021 were related to capital structure changes we made in fiscal year 2021 as a result of our IPO in April, 2021. There were no such costs incurred for the fiscal year endedDecember 31, 2022 .
Other Income (Expense)
Other income was$85.5 million for the fiscal year endedDecember 31, 2022 , compared to other income of$4.9 million for the fiscal year endedJanuary 1, 2022 , an increase of$80.6 million . We realized a$72.2 million increase in valuation gains associated with interest rate derivatives in fiscal year 2022 resulting from the market expectation of an increase in interest rates. Net settlements incurred with swap counterparties also decreased$9.5 million as interest rates moved above the swap rate in the second half of fiscal year 2022, resulting in net cash received from swap counterparties. Details of other income in fiscal years 2022 and 2021 included the following: 64 -------------------------------------------------------------------------------- For the fiscal years ended (dollars in thousands) December 31, 2022 January 1, 2022 Valuation gain (loss) to state interest rate derivatives at fair value $ 85,367 $ 13,194 Net settlements incurred with interest rate derivative counterparties (101 ) (9,571 ) Other 237 1,291 Total other income (expense) $ 85,503 $ 4,914 Income Taxes We incurred income tax benefit of$1.8 million for the fiscal year endedDecember 31, 2022 , as compared to income tax expense of$3.5 million for the fiscal year endedJanuary 1, 2022 , a net 151.3% decrease. This decrease in tax expense was primarily driven by changes in federal and state valuation allowances, changes in uncertain tax positions, and federal and state current tax expense. Non-GAAP Financial Measures In addition to our results of operations prepared in accordance withU.S. generally accepted accounting principles ("U.S. GAAP"), which we have discussed above, we also evaluate our financial performance using EBITDA, Adjusted EBITDA, Field contribution and Field contribution margin.
EBITDA and Adjusted EBITDA
EBITDA and Adjusted EBITDA are non-GAAP financial measures and are not intended to replace financial performance measures determined in accordance withU.S. GAAP, such as net income (loss). Rather, we present EBITDA and Adjusted EBITDA as supplemental measures of our performance. We define EBITDA as net income (loss) before interest expense, net; income tax (expense) benefit; and depreciation and amortization. We define Adjusted EBITDA as EBITDA, adjusted for the impact of certain other items that are either non-recurring, infrequent, non-cash, unusual, or items deemed by management to not be indicative of the performance of our core operations, including impairments of goodwill, intangible assets, and other long-lived assets; non-cash, share-based compensation; sponsor fees; loss on extinguishment of debt; fees related to debt modifications; the effect of interest rate derivatives; acquisition-related and integration costs; legal costs and settlements associated with acquisition matters; COVID-19 related costs; restructuring costs; other legal matters; and other system transition costs, professional fees and other costs. As non-GAAP financial measures, our computations of EBITDA and Adjusted EBITDA may vary from similarly termed non-GAAP financial measures used by other companies, making comparisons with other companies on the basis of this measure impracticable. Management believes our computations of EBITDA and Adjusted EBITDA are helpful in highlighting trends in our core operating performance. In determining which adjustments are made to arrive at EBITDA and Adjusted EBITDA, management considers both (1) certain non-recurring, infrequent, non-cash or unusual items, which can vary significantly from year to year, as well as (2) certain other items that may be recurring, frequent, or settled in cash but which management does not believe are indicative of our core operating performance. We use EBITDA and Adjusted EBITDA to assess operating performance and make business decisions. We have incurred substantial acquisition-related costs and integration costs in fiscal years 2022 and 2021. The underlying acquisition activities take place over a defined timeframe, have distinct project timelines and are incremental to activities and costs that arise in the ordinary course of our business. Therefore, we believe it is important to exclude these costs from our Adjusted EBITDA because it provides management a normalized view of our core, ongoing operations after integrating our acquired companies, which is an important measure in assessing our performance.
Given our determination of adjustments in arriving at our computations of EBITDA
and Adjusted EBITDA, these non-GAAP measures have limitations as analytical
tools and should not be considered in isolation or as substitutes or
alternatives to net income or loss, revenue, operating income or loss, cash
flows from operating activities, total indebtedness or any other financial
measures calculated in accordance with
65
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The following table reconciles net loss to EBITDA and Adjusted EBITDA for the
periods indicated:
For the fiscal years ended
(dollars in thousands) December 31, 2022 January 1, 2022
Net income (loss) $ (662,034 ) $ (117,044 )
Interest expense, net 107,041 68,677
Income tax (benefit) expense (1,780 ) 3,468
Depreciation and amortization 21,313
20,550
EBITDA (535,460 ) (24,349 )Goodwill , intangible and other long-lived asset impairment 679,019
117,812
Non-cash share-based compensation 15,893
14,425
Sponsor fees (1) - 808 Loss on extinguishment of debt -
13,702
Bank fees related to debt modifications - 7,178 Interest rate derivatives (2) (85,265 ) (4,746 ) Acquisition-related costs (3) 99 12,832 Integration costs (4) 17,793 17,515 Legal costs and settlements associated with acquisition matters (5) 4,082
1,595
COVID-related costs, net of reimbursement (6) 5,087 18,865 Restructuring (7) 6,775 - Other legal matters (8) 12,240 - Other system transition costs, professional fees and other (9) 9,059 8,596 Total adjustments (10) $ 664,782 $ 208,582 Adjusted EBITDA $ 129,322 $ 184,233 1. Represents annual management fees paid to our sponsors under the Management Agreement as defined in Note 17 - Related Party Transactions to the Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K. The Management Agreement terminated in accordance with its terms upon completion of our IPO. 2. Represents valuation adjustments and settlements associated with interest rate derivatives that are not included in interest expense, net. Such items are included in other income. 3. Represents transaction costs incurred in connection with planned, completed, or terminated acquisitions, which include investment banking fees, legal diligence and related documentation costs, and finance and accounting diligence and documentation, as presented on the Company's consolidated statements of operations. 4. Represents (i) costs associated with our Integration Management Office, which focuses on our integration efforts and transformational projects such as systems conversions and implementations, material cost reduction and restructuring projects, among other things, of$2.8 million and$3.6 million for the fiscal years endedDecember 31, 2022 andJanuary 1, 2022 , respectively; and (ii) transitionary costs incurred to integrate acquired companies into our field and corporate operations of$15.0 million and$13.9 million for the fiscal years endedDecember 31, 2022 andJanuary 1, 2022 , respectively. Transitionary costs incurred to integrate acquired companies include IT consulting costs and related integration support costs; salary, severance and retention costs associated with duplicative acquired company personnel until such personnel are exited from the Company; accounting, legal and consulting costs; expenses and impairments related to the closure and consolidation of overlapping markets of acquired companies, including lease termination and relocation costs; costs associated with terminating legacy acquired company contracts and systems; and one-time costs associated with rebranding our acquired companies and locations to the Aveanna brand. 5. Represents legal and forensic costs, as well as settlements associated with resolving legal matters arising during or as a result of our acquisition-related activities. This primarily includes costs of$3.8 million and$1.5 million for the fiscal years endedDecember 31, 2022 andJanuary 1, 2022 , respectively, to comply with the U.S.Department of Justice, Antitrust Division's grand jury subpoena related to nurse wages and hiring activities in certain of our markets, in connection with a terminated transaction. 6. Represents costs incurred as a result of the COVID-19 environment, primarily including, but not limited to, (i) relief, vaccine, and hero pay provided to our caregivers; staffing and retention related incentives to attract and retain caregivers in the midst of the Omicron surge; and other incremental compensation costs; (ii) sick leave for our caregivers required byOSHA's Emergency Temporary Standard, costs required to comply with federal, state and local vaccination mandates and testing requirements, and worker compensation costs for mandated quarantine time; (iii) incremental PPE costs; and (iv) salary, severance and lease termination costs associated with workforce reductions necessitated by COVID-19; net of temporary reimbursement rate 66 -------------------------------------------------------------------------------- increases provided by certain state Medicaid and Medicaid Managed Care programs which approximated$0.1 million for the fiscal year endedJanuary 1, 2022 . 7. Represents costs associated with restructuring our branch and regional administrative footprint as well as our corporate overhead infrastructure costs during the fiscal year endedDecember 31, 2022 , in order to appropriately size our resources to current volumes, including (i) branch and regional salary and severance costs; (ii) corporate salary and severance costs; and (iii) rent and lease termination costs associated with the closure of certain office locations. Restructuring costs also include compensation, severance and related benefits costs associated with the executive transition plan effective onDecember 31, 2022 . There were no such costs for the fiscal year endedJanuary 1, 2022 . 8. Represents accrued legal settlements and related costs and expenses associated with certain judgments and arbitration awards rendered against the Company related to a civil litigation matter inTexas , and under which insurance coverage is in dispute. 9. Represents (i) costs associated with the implementation of, and transition to, new electronic medical record systems and billing and collection systems, duplicative system costs while such transformational projects are in-process, and other system transition costs of$6.0 million and$5.6 million for the fiscal years endedDecember 31, 2022 , andJanuary 1, 2022 , respectively; and (ii) professional fees associated with preparation for Sarbanes-Oxley compliance, advisory fees associated with preparation for and execution of our initial public equity offering of$3.2 million and$4.5 million for the fiscal years endedDecember 31, 2022 , andJanuary 1, 2022 , respectively; and (iii)$(0.2) million of net gains on disposal of businesses during the fiscal year endedDecember 31, 2022 (there were no such gains or losses in the prior fiscal year); (iv) costs associated with obtaining certificates of need of$0.3 million for the fiscal year endedDecember 31, 2022 (there were no such costs in the prior fiscal year); and (v) certain other costs or (income) that are either non-cash or non-core to the Company's ongoing operations of($0.2) million and($1.5) million for the fiscal years endedDecember 31, 2022 , andJanuary 1, 2022 , respectively. 10. The table below reflects the increase or decrease, and aggregate impact, to the line items included on our consolidated statements of operations based upon the adjustments used in arriving at Adjusted EBITDA from EBITDA for the periods indicated: Impact to Adjusted EBITDA For the fiscal years ended (dollars in thousands) December 31, 2022 January 1, 2022 Revenue $ 139 $ (153 ) Cost of revenue, excluding depreciation and amortization 19,310
16,948
Branch and regional administrative expenses 9,395 6,454 Corporate expenses 42,343 46,345 Goodwill impairment 675,346 117,702 Acquisition-related costs 99 12,832 Other operating expense (income) 3,652 (337 ) Loss on debt extinguishment - 13,702 Other (income) expense (85,502 ) (4,911 ) Total adjustments $ 664,782 $ 208,582
Field contribution and Field Contribution Margin
Field contribution and Field contribution margin are non-GAAP financial measures and are not intended to replace financial performance measures determined in accordance withU.S. GAAP, such as operating income (loss). Rather, we present Field contribution and Field contribution margin as supplemental measures of our performance. We define Field contribution as operating income (loss) prior to corporate expenses and other non-field related costs, including depreciation and amortization, acquisition-related costs, and other operating expenses. Field contribution margin is Field contribution as a percentage of revenue. As non-GAAP financial measures, our computations of Field contribution and Field contribution margin may vary from similarly termed non-GAAP financial measures used by other companies, making comparisons with other companies on the basis of these measures impracticable.
Field contribution and Field contribution margin have limitations as analytical
tools and should not be considered in isolation or as substitutes or
alternatives to net income or loss, revenue, operating income or loss, cash
flows from operating activities, total indebtedness or any other financial
measures calculated in accordance with
Management believes Field contribution and Field contribution margin are helpful
in highlighting trends in our core operating performance and evaluating trends
in our branch and regional results, which can vary from year to year. We use
Field contribution and Field contribution margin to make business decisions and
assess the operating performance and results delivered by our core field
operations, prior to corporate and other costs not directly related to our field
operations. These metrics are also important because they guide us in
determining whether or not our branch and regional administrative expenses are
appropriately sized to support our caregivers
67
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and direct patient care operations. Additionally, Field contribution and Field
contribution margin determine how effective we are in managing our field
supervisory and administrative costs associated with supporting our provision of
services and sale of products.
The following table reconciles operating income to Field contribution and Field contribution margin for the periods indicated:
For the fiscal years ended
(dollars in thousands) December 31, 2022 January 1, 2022
Operating loss $ (642,276 ) $ (36,111 )
Other operating expense (income) 3,651 (337 )
Acquisition-related costs 99 12,832
Depreciation and amortization 21,313 20,550
Goodwill impairment 675,346 117,702
Corporate expenses 137,864 130,387
Field contribution $ 195,997 $ 245,023
Revenue $ 1,787,645 $ 1,678,618
Field contribution margin 11.0 % 14.6 %
68--------------------------------------------------------------------------------
Liquidity and Capital Resources
Overview
Our principal sources of cash have historically been from operating activities. Our principal source of liquidity in excess of cash from operating activities has historically been from proceeds from our credit facilities and issuances of common stock. In May, 2021 we raised net proceeds of$477.7 million from our initial public offering, after deducting underwriting discounts and commissions and inclusive of our underwriters' partial exercise of their overallotment option. We used$407.0 million of these proceeds to repay certain first lien and second lien debt obligations with the balance used for acquisitions in fiscal year 2021 and general corporate purposes. InNovember 2021 , we entered into the Securitization Facility, which we also use as a source of liquidity for completing acquisitions and for working capital as needed. Our principal uses of cash and liquidity have historically been for acquisitions, interest and principal payments under our credit facilities, payments under our interest rate swaps, and financing of working capital. Payment of interest and related fees under our credit facilities is the most significant use of our operating cash flow. Our goal is to use cashflow provided by operations as a source of cash to reduce our net leverage and supplement the purchase price of acquisitions. As permitted by the CARES Act, we deferred payment of$46.8 million of payroll taxes to the Internal Revenue Service ("IRS") in fiscal year 2020, which increased our net cash provided by operating activities and available cash on hand. Certain companies we acquired in fiscal years 2020 and 2021 had also deferred payroll taxes of$4.6 million in aggregate in fiscal year 2020. We did not defer any payroll taxes afterDecember 31, 2020 . InDecember 2021 , we paid$25.9 million to theIRS , reducing our aggregate deferred payroll tax liabilities to$25.5 million as ofJanuary 1, 2022 , which we paid in full to theIRS inDecember 2022 . Certain of our acquired home health and hospice companies received advance payments from CMS inApril 2020 pursuant to the CARES Act. Receipt of the advances did not increase our net cash provided by operating activities in fiscal year 2020 as such amounts reduced the respective purchase prices of those acquired companies. Gross advances received by acquired companies totaled$15.7 million . We began repaying the gross amount of the advances inApril 2021 , using cash from operating activities, and repaid$12.2 million of such advances in fiscal year 2021 and repaid the remaining$3.5 million in fiscal year 2022. In connection with the enforcement of a$19.8 million legal judgment, inMarch 2023 $18.4 million of cash was garnished from the Company's accounts via a writ of garnishment. In response, we promptly recorded an$18.4 million cash collateralized appellate bond with the court and filed a motion to dissolve the writ of garnishment and return the previously garnished funds. We expect the court to grant our motion to dissolve the writ of garnishment and refund in full the$18.4 million of cash previously garnished from our accounts. With respect to the$18.4 million of cash collateral supporting our appellate bond, this cash is restricted and reduces cash available to us for general working capital purposes until the appeal process is concluded, which could take up to, or potentially more than, 24 months. We have drawn on our Securitization Facility and Revolving Credit Facility to replace cash subject to garnishment and also to fund the appellate bond. In response to a$7.9 million arbitration award rendered against us in connection with this civil litigation matter, we may be required to fund up to$7.9 million of cash collateral while this matter is under appeal. This cash collateral would also be restricted and would otherwise reduce cash available to us for general working capital purposes until the appeal process is concluded. If we are required to fund this cash collateral, we intend to use available cash on hand or borrow under our Revolving Credit Facility based on circumstances at the time of funding. In connection with a settlement agreement we entered into inMarch 2023 with the sellers ofEpic/Freedom LLC and other defendants (collectively, the "Defendants"), we will fund, inApril 2023 , approximately$6.8 million to an escrow account for the purposes of settling certain tax audits with theIRS , which are currently under appeal with theIRS . At such time as the audits are concluded, these escrowed funds will be used to satisfy any additional amounts due to theIRS or paid to the Sellers. To the extent that any additional amounts due to theIRS exceed the escrowed funds, Aveanna as taxpayer will be required to fund such amounts, however has contractual rights to reimbursement from the Defendants. We expect these tax matters to conclude in the second half of 2023. We intend to fund this escrow 69 --------------------------------------------------------------------------------
account with cash on hand or borrowing capacity under our Revolving Credit Facility based on circumstances at the time of funding.
AtDecember 31, 2022 we had$19.2 million in cash on hand,$35.0 million available to us under our securitization facility and$180.3 million of borrowing capacity under the Revolving Credit Facility. Available borrowing capacity under the revolving credit facility is subject to a maintenance leverage covenant that becomes effective if more than 30% of the total commitment is utilized, subject to a$15.0 million carve-out for letters of credit. We believe that borrowing capacity under the Revolving Credit Facility will decrease in the first quarter of 2023. We believe that our operating cash flows, available cash on hand, and availability under our Securitization Facility and Revolving Credit Facility will be sufficient to meet our cash requirements for at least the next twelve months. Our future capital requirements will depend on many factors that are difficult to predict, including the size, timing and structure of any future acquisitions, future capital investments and future results of operations. We cannot assure you that cash provided by operating activities or cash and cash equivalents will be sufficient to meet our future needs. If we are unable to generate sufficient cash flows from operations in the future, we may have to obtain additional financing. If we obtain additional capital by issuing equity, the interests of our existing stockholders will be diluted. If we incur additional indebtedness, that indebtedness may contain significant financial and other covenants that may significantly restrict our operations. We cannot assure you that we could obtain refinancing or additional financing on favorable terms or at all.
Cash Flow Activity
The following table sets forth a summary of our cash flows from operating, investing, and financing activities for the fiscal years presented:
For the fiscal years ended
(dollars in thousands) December 31, 2022 January 1, 2022
Net cash used in operating activities $ (48,402 )$ (11,350 ) Net cash used in investing activities $ (25,291 )$ (681,831 ) Net cash provided by financing activities $ 62,420$ 586,326 Operating Activities The primary sources or uses of our operating cash flow are operating income or operating losses, net of any goodwill impairments that we record as well as any other significant non-cash items such as depreciation, amortization and share-based compensation, less cash paid for interest. The timing of collections of accounts receivable and the payment of accounts payable, other accrued liabilities and accrued payroll can also impact and cause fluctuations in our operating cash flow. Cash used in operating activities increased by$37.1 million in fiscal year 2022 compared to fiscal year 2021, primarily due to:
•
growth in operating losses in fiscal year 2022, net of significant non-cash items such as goodwill impairment, depreciation and amortization, share-based compensation, and loss on disposal of licenses; • a net increase in cash paid for interest and cash paid to derivative counterparties from$68.5 million in fiscal year 2021 to$102.6 million in fiscal year 2022; net of • the comparable provision of cash associated with operating assets and liabilities over the comparable periods, primarily associated with insurance reserves.
Days Sales Outstanding ("DSO")
DSO provides us with a gauge to measure the timing of cash collections against
accounts receivable and related revenue. DSO is derived by dividing our average
patient accounts receivable for the fiscal period by our average daily revenue
for the fiscal period. The collection cycle for our HHH segment is generally
longer than that of our PDS segment, primarily due to longer billing cycles for
HHH, which is generally billed in thirty day increments. The following table
presents our trailing five quarter DSO for the respective periods:
December 31,
January 1, 2022 April 2, 2022 July 2, 2022 October 1, 2022 2022
Days Sales Outstanding 44.9 46.5 50.0 47.8 44.5
70--------------------------------------------------------------------------------
Investing Activities
Net cash used in investing activities was$25.3 million for the fiscal year endedDecember 31, 2022 , as compared to$681.8 million for the fiscal year endedJanuary 1, 2022 . The$656.5 million decrease in cash used in the fiscal year endedDecember 31, 2022 was primarily related to the significant acquisition activity in fiscal year 2021 which was not present in fiscal year 2022. Cash paid for acquisitions of businesses, net of cash acquired, was$2.0 million in 2022 as compared to$666.9 million in 2021.
Financing Activities
Net cash provided by financing activities decreased by$523.9 million , from$586.3 million for the fiscal year endedJanuary 1, 2022 to$62.4 million for the fiscal year endedDecember 31, 2022 . The$62.4 million net cash provided in fiscal year 2022 was primarily related to the following items:
•
$59.7 million in net proceeds drawn under the Delayed Draw Term Loan Facility; •$20.0 million in net proceeds drawn under our Securitization Facility; net of •$18.8 million of principal payments on term loans and notes payable.
The
•
$477.7 million in net proceeds from the IPO; •$120.0 million in net proceeds from our Securitization Facility; •$42.4 million in net proceeds from the issuance and repayment of certain term loans and notes payable in fiscal year 2021; net of • payment of$15.2 million of debt issuance costs; and • the return of$31.9 million of government stimulus funds, net of$2.5 million of funds received. Indebtedness We typically incur term loan indebtedness to finance our acquisitions, and we borrow under our Securitization Facility and Revolving Credit Facility from time to time for working capital purposes, as well as to finance acquisitions, as needed. The following table presents our current and long-term obligations under our credit facilities as ofDecember 31, 2022 andJanuary 1, 2022 , as well as related interest expense for fiscal years 2022 and 2021, respectively: Current and Long-term Interest Expense (dollars in thousands) Obligations
For the fiscal years ended
December 31, December 31,
Instrument 2022 January 1, 2022 Interest Rate 2022 January 1, 2022
Initial First Lien Term Loan
(1) $ - $ - L + 4.25% $ - $ 15,911
First Lien First Amendment
Term Loan (1) - - L + 5.50% - 7,599
First Lien Fourth Amendment
Term Loan (1) - - L + 6.25% - 5,749
Second Lien Term Loan (1) - - L + 8.00% - 7,252
Incremental Second Lien Term
Loan (1) - - L + 8.00% - 285
2021 Extended Term Loan
(2)(3) 908,950 857,850 L + 3.75% 55,923 19,384
Term Loan - Second Lien Term
Loan (2) 415,000 415,000 L + 7.00% 36,538 1,903
Revolving Credit Facility
(2) - - L + 3.75% 889 -
Securitization Facility (4) 140,000 120,000 BSBY + 2.25% 5,513 271
Amortization of debt
issuance costs - - 7,780 8,698
Other - - 1,077 1,878
Total Indebtedness $ 1,463,950 $ 1,392,850 $ 107,720 $ 68,930
Weighted Average Interest
Rate (5) 8.9 % 5.0 %
1.Variable rate debt instruments which accrue interest at a rate equal to the LIBOR rate (subject to a minimum of 1.00%), plus an applicable margin.
71
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Variable rate debt instruments which accrue interest at a rate equal to the LIBOR rate (subject to a minimum of 0.50%), plus an applicable margin. 3. 2021 Extended Term Loan includes$59.7 million outstanding as ofDecember 31, 2022 associated with the Delayed Draw Term Loan Facility ("DDTL"). No amounts were outstanding under the DDTL atJanuary 1, 2022 . The Company incurred commitment fees of$7.3 and$2.1 million in fiscal years 2022 and 2021, respectively, in order to maintain the availability of the DDTL. The Company terminated the DDTL commitment inNovember 2022 . 4. Variable rate debt instrument that accrues interest at a rate equal to the Bloomberg Short-term Bank Yield Index ("BSBY") plus an applicable margin. 5. Represents the weighted average annualized interest rate based upon the outstanding balances atDecember 31, 2022 andJanuary 1, 2022 , respectively, and the applicable interest rates at that date.
We were in compliance with all financial covenants and restrictions related to
existing credit facilities at
OnMarch 11, 2021 , we amended our senior secured revolving credit facility under the First Lien Credit Agreement (the "Revolving Credit Facility") to increase the maximum availability to$200.0 million , subject to the occurrence of an initial public offering prior toDecember 31, 2021 , which was completed onMay 3, 2021 . The amendment also extended the maturity date toApril 29, 2026 upon completion of the IPO and subject to the completion of the refinancing of our terms loans, which occurred with the Extension Amendment. OnMay 3, 2021 , we completed our initial public offering, and with a portion of the proceeds received, paid an aggregate principal amount of$307.0 million to repay in full all outstanding obligations under the Prior SecondLien Credit Agreement, including the incremental amount borrowed in connection with financing the acquisition of Doctor's Choice, thereby terminating the Prior Second Lien Credit Agreement. In addition, onMay 4, 2021 , we repaid$100.0 million in principal amount of our outstanding indebtedness under our First Lien Credit Agreement. OnMay 4, 2021 , following completion of the initial public offering and satisfaction of the other applicable conditions precedent, the maximum availability of our Revolving Credit Facility increased from$75.0 million to$200.0 million . In connection with this increase in capacity, we incurred debt issuance costs of$1.6 million , which we capitalized and included in other long-term assets. OnJuly 15, 2021 we entered into an Extension Amendment (the "Extension Amendment") to our First Lien Credit Agreement, originally dated as ofMarch 16, 2017 , with Barclays Bank, as administrative agent, the collateral agent, a letter of credit issuer, and swingline lender, and the lenders and other agents party thereto from time to time (as amended to date, the "FirstLien Credit Agreement"). The Extension Amendment converted outstanding balances under all remaining first lien term loans into a single term loan in an aggregate principal amount of$860.0 million (the "2021 Extended Term Loan"), and extended the maturity date toJuly 2028 . The Extension Amendment also provided for a delayed draw term loan facility (the "Delayed Draw Term Loan Facility") in an aggregate principal amount of$200.0 million , which permitted us to incur senior secured first lien term loans (the "Delayed Draw Term Loans") from time to time untilJuly 15, 2023 , in each case subject to certain terms and conditions. OnAugust 9, 2022 we borrowed$60 million under the Delayed Draw Term Loan Facility to replace cash on our balance sheet previously used to complete acquisitions in the fourth quarter of fiscal year 2021. We terminated the remaining available amount of$140.0 million under the DDTL onNovember 16, 2022 . For the 2021 Extended Term Loan and the Delayed Draw Term Loans, we can elect, at our option, the applicable interest rate for borrowings using a variable interest rate based on either LIBOR (subject to a minimum of 0.50%), prime or federal funds rate ("Annual Base Rate" or "ABR") (subject to a minimum of 2.00%) for the interest period relevant to such borrowing, plus an applicable margin of 3.75% for loans accruing interest based on LIBOR and an applicable margin of 2.75% for loans accruing interest based on ABR, which are subject to certain adjustments as set forth in the First Lien Credit Agreement. The$857.9 million principal amount of the 2021 Extended Term Loan currently accrues interest at a rate equal to 4.25%. Undrawn portions of the Delayed Draw Term Loan Facility incur a commitment fee of 50% of the LIBOR margin of 3.75% beginning 45 days after the amendment date, and the full LIBOR margin beginning 90 days after the amendment date. 72 -------------------------------------------------------------------------------- OnJuly 15, 2021 , we also amended our interest rate swap agreements to extend the expiration dates toJune 30, 2026 and reduce the fixed rate paid under the swaps. As amended, our swap rate decreased to 2.08% from 3.107%, with a reduction in the LIBOR floor under the swaps from 1.00% to 0.50%. The notional amount under the interest rate swaps remains at$520.0 million . We also entered into a three-year,$340.0 million notional interest rate cap agreement with a cap rate of 1.75%. in July, 2021, which we sold inNovember 2021 . OnAugust 9, 2021 , we entered into the Seventh Amendment to the First Lien Credit Agreement to reduce the interest rates applicable to loans under the Revolving Credit Facility. As amended, such revolving loans bear interest, at our election, at a variable interest rate based on either LIBOR (subject to a minimum of 0.50%) or ABR (subject to a minimum of 2.00%) for the interest period relevant to such borrowing, plus an applicable margin of 3.75% for loans accruing interest based on LIBOR and an applicable margin of 2.75% for loans accruing interest based on ABR. OnNovember 12, 2021 , we entered into a three-year Securitization Facility (the "Securitization Facility") which increases the Company's borrowing capacity by collateralizing a portion of our patient accounts receivable at favorable interest rates relative to our 2021 Extended Term Loan. The maximum amount available under the Securitization Facility is$150.0 million , subject to maintenance of certain borrowing base requirements. Borrowings under this facility carry variable interest rates tied to BSBY plus an applicable margin. Please see Note 7 - Securitization Facility, to the audited Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K for further discussion related to the Securitization Facility. OnAugust 8, 2022 , we amended our Securitization Facility to increase the maximum amount available to$175.0 million , subject to maintaining certain borrowing base requirements. OnDecember 10, 2021 , we entered into a Second Lien Credit Agreement (the "Second Lien Credit Agreement" and together with the FirstLien Credit Agreement, the "Senior Secured Credit Facilities") with a syndicate of lending institutions and Barclays Bank, as administrative agent and collateral agent, which provides for a second lien term loan (the "Second Lien Term Loan") in an aggregate principal amount of$415.0 million , which matures onDecember 10, 2029 . The Second Lien Term Loan bears interest at a rate per annum equal to, at our option, either (1) an applicable margin (equal to 6.00%) plus a base rate determined by reference to the highest of (a) 0.50% per annum plus the Federal Funds Effective Rate, (b) the Prime Rate and (c) the LIBOR rate determined by reference to the cost of funds forU.S. dollar deposits for an interest period of one month adjusted for certain additional costs, plus 1.00%; or an applicable margin (equal to 7.00%) plus LIBOR determined by reference to the cost of funds forU.S. dollar deposits for the interest period relevant to such borrowing adjusted for certain additional costs; provided that such rate is not lower than a floor of 0.50%. OnFebruary 9, 2022 we entered into a five-year,$880.0 million notional interest rate cap agreement with a cap rate of 3.0%. The cap agreement provides that the counterparty will pay us the amount by which LIBOR exceeds 3.0% in a given measurement period and expires inFebruary 2027 . InJuly 2017 , theU.K. Financial Conduct Authority , the regulator of the LIBOR, indicated that it will no longer require banks to submit rates to the LIBOR administrator after 2021 ("LIBOR Phaseout"). This announcement signaled that the calculation of LIBOR and its continued use could not be guaranteed after 2021 and the anticipated cessation date isJune 30, 2023 . A change away from LIBOR may impact our Senior Secured Credit Facilities. We continue to monitor developments related to the LIBOR transition and/or identification of an alternative, market-accepted rate. The impact related to any changes cannot be predicted at this time. For further information on the impact related to the LIBOR Phaseout and the effect of significant increase in interest rates over fiscal year 2022, see "Risk Factors- Risks Related to Our Business and Industry-Our variable rate indebtedness subjects us to interest rate risk, which could cause our indebtedness service obligations to increase significantly."
Contractual Obligations
Our contractual obligations consist primarily of long-term debt obligations,
interest payments, operating and financing leases. These contractual obligations
impact our short-term and long-term liquidity and capital needs.
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In preparing our consolidated financial statements in conformity withU.S. GAAP, we must use estimates and assumptions that affect the reported amounts of assets and liabilities and related disclosures and the reported amounts of revenue and expenses. In general, our estimates are based on historical experience and various other assumptions we believe are reasonable under the circumstances. We evaluate our estimates on an ongoing basis and make changes to the estimates and related disclosures as experience develops or new information becomes known. Actual results could differ from those estimates. We believe the following critical accounting estimates affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
Patient Services and Product Revenue
Because our services have no fixed duration and can be terminated by the patient or the facility at any time, we consider each treatment as a stand-alone contract for revenue recognition purposes. Additionally, as services ordered by a healthcare provider in an episode of care cannot be separately identified, we combine all services provided into a single performance obligation for each contract. We recognize patient revenue in the reporting period in which we perform the service, and we recognize product revenue on the date required shipping commitments have been completed. We have minimal unsatisfied performance obligations at the end of the reporting period as our patients typically are under no obligation to remain under our care. All revenue is recognized based on established billing rates reduced by contractual adjustments and discounts provided to third-party payers and implicit price concessions. Contractual adjustments and discounts are based on contractual agreements and historical experience. Implicit price concessions are based on historical collection experience. Our revenue cycle management systems calculate contractual adjustments and discounts on a patient-by-patient or product-by-product basis based on the rates in effect for each primary third-party payer. Due to complexities involved in determining amounts ultimately due under reimbursement arrangements with third-party payers, which are often subject to interpretation and review, we may receive reimbursement for healthcare services authorized and provided that is different from our estimates. In addition, due to changes in general economic conditions, patient accounting service center operations, or payer mix, historical collection experience may not accurately reflect current period collections. We continually review the contractual and implicit concession estimation process to consider and incorporate updates to laws and regulations and the frequent changes in managed care contractual terms that result from contract renegotiations and renewals. In addition, laws and regulations governing the Medicaid, Medicaid MCO and Medicare programs are complex and subject to interpretation. If actual results are not consistent with our assumptions and judgments, we may be exposed to gains or losses that could be material.
Business Combinations
We account for acquisitions of entities that qualify as business combinations
under the acquisition method of accounting in accordance with ASC 805, Business
Combinations. In determining whether an acquisition should be accounted for as a
business combination or asset acquisition, we first determine whether
substantially all of the fair value of the gross assets acquired is concentrated
in a single identifiable asset or a group of similar identifiable assets. If
this is the case, the single identifiable asset or the group of similar assets
is not deemed to be a business and is instead deemed to be an asset. Under the
acquisition method of accounting, the total consideration is allocated to the
tangible and identifiable intangible assets acquired and liabilities assumed
based on their estimated fair values at the acquisition date. The excess of the
purchase price over the fair values of these identifiable assets and liabilities
is recorded as goodwill. During the measurement period, which may be up to one
year from the acquisition date, we may record adjustments to the assets acquired
and liabilities assumed with the corresponding offset to goodwill.
In determining the fair value of assets acquired and liabilities assumed in a
business combination, we primarily use an income approach to estimate the value
of tradenames acquired and a cost approach to estimate the value of licenses
acquired. The income approach utilizes projected operating results and cash
flows and includes significant assumptions such as base revenue, revenue growth
rate, projected EBITDA margin, discount rates, rates of increase in operating
expenses, and the future effective income tax rates. The cost approach utilizes
projected cash outflows and includes significant assumptions such as projected
facility costs, projected administrative costs and estimates of the time and
effort to acquire a license. The valuations of our significant acquired
companies have been performed by
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a third-party valuation specialist under our management's supervision. We
believe that the estimated fair value assigned to the assets acquired and
liabilities assumed is based on reasonable assumptions and estimates that
marketplace participants would use. However, such assumptions are inherently
uncertain and actual results could differ from those estimates. Future changes
in our assumptions or the interrelationship of those assumptions may result in
purchase price allocations that are different than those recorded in recent
years.
Acquisitions related costs are not considered part of the consideration paid and
are expensed as operating expenses as incurred. Contingent consideration, if
any, is measured at fair value initially on the acquisition date as well as
subsequently at the end of each reporting period until the contingency is
resolved and settlement occurs. Subsequent adjustments to contingent
considerations are recorded in our consolidated statements of operations. We
include the results of operations of the businesses acquired as of the beginning
of the acquisition dates.
Goodwill
We perform an impairment test for goodwill and indefinite-lived intangible
assets at least annually or more frequently if adverse events or changes in
circumstances indicate that the asset may be impaired. We perform our annual
goodwill impairment test on the first day of the fourth quarter of each fiscal
year for each of our reporting units. Tests are performed more frequently if
events occur or circumstances change that would more likely than not reduce the
fair value of the reporting unit below its carrying amount. The impairment test
is a single-step process. The process requires us to estimate and compare the
fair value of a reporting unit to its carrying amount, including goodwill. If
the fair value exceeds the carrying amount, the goodwill is not considered
impaired. To the extent a reporting unit's carrying amount exceeds its fair
value, the reporting unit's goodwill is deemed impaired, and an impairment
charge is recognized based on the excess of a reporting unit's carrying amount
over its fair value. The fair value of the reporting units is measured using
Level 3 inputs such as operating cash flows and market data.
A reporting unit is either an operating segment or one level below the operating
segment, referred to as a component. When the components within our operating
segments have similar economic characteristics, we aggregate the components of
our operating segments into one reporting unit. Since quoted market prices for
our reporting units are not available, we apply judgment in determining the fair
value of these reporting units for purposes of performing the goodwill
impairment test. For both interim and annual goodwill impairment tests, we
engage a third-party valuation firm to assist management in calculating a
reporting unit's fair value, which is derived using a combination of both income
and market approaches. The income approach utilizes projected operating results
and cash flows and includes significant assumptions such as revenue growth
rates, projected EBITDA margins, and discount rates. The market approach
compares reporting units' earnings and revenue multiples to those of comparable
companies. Estimates of fair value may differ from actual results due to, among
other things, economic conditions, changes to business models or changes in
operating performance. These factors increase the risk of differences between
projected and actual performance that could impact future estimates of fair
value of all reporting units. Significant differences between these estimates
and actual future performance could result in impairment in future fiscal years.
During fiscal year 2022, we recorded two impairment charges as a result of
continuing inflationary and overall cost pressures, which had the effect of
constraining patient volume growth in relation to costs across most of our
businesses. We performed an interim impairment assessment as of July 2, 2022 and
based on that assessment, we determined that the carrying value of five of our
six reporting units across our three segments exceeded their respective fair
values and accordingly recorded an aggregate goodwill impairment charge of
$470.2 million during the three-month period ended July 2, 2022 . During our
annual goodwill impairment test during the fourth quarter of fiscal year 2022,
we determined that the carrying value of five of our six reporting units across
our three segments exceeded their respective fair values and accordingly
recorded an aggregate goodwill impairment charge of $205.1 million during the
three-month period ended December 31, 2022 .
We can provide no assurance that our goodwill will not become subject to impairment in any future period.
Insurance Reserves
As is typical in the healthcare industry, we are subject to claims that our services have resulted in patient injury or other adverse effects.
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The Company maintains primary commercial insurance coverage on a claims made
basis for professional malpractice claims with a $1.5 million per claim
deductible and $5.0 million per claim and annual aggregate limits as of October
1, 2022 . The Company maintains excess insurance coverage for professional
malpractice claims. In addition, the Company maintains workers' compensation
insurance with a $0.5 million per claim deductible and statutory limits. Our
insurance reserves include estimates of the ultimate costs, including
third-party legal defense costs for claims that have been reported but not paid
and claims that have been incurred but not reported at the balance sheet dates.
Although substantially all reported claims are paid directly by our commercial
insurance carriers (less any applicable deductibles and/or self-insured
retentions), we are ultimately responsible for payment of these claims in the
event our insurance carriers become insolvent or otherwise do not honor the
contractual obligations under the malpractice policies. We are required under
U.S. GAAP to recognize these estimated liabilities in our consolidated financial
statements on a gross basis, with a corresponding receivable from the insurance
carriers reflecting the contractual indemnity provided by the carriers under the
related malpractice policies.
Our insurance reserves require management to make assumptions and apply judgment
to estimate the ultimate cost of reported claims and claims incurred but not
reported as of the balance sheet date. Our reserves and provisions for
professional liability, general liability, and workers' compensation risks are
based largely upon semi-annual actuarial calculations prepared by third-party
actuaries. Periodically, we review our assumptions and the valuations provided
by third-party actuaries to determine the adequacy of our insurance reserves.
The following are certain of the key assumptions and other factors that
significantly influence our estimate of insurance reserves:
•
historical claims experience; • trending of loss development factors; • trends in the frequency and severity of claims; • coverage limits of third-party insurance; • statistical confidence levels; • medical cost inflation; and • payroll dollars. The time period to resolve claims can vary depending upon the jurisdiction, the nature, and the form of resolution of the claims. The estimation of the timing of payments beyond a year can vary significantly. In addition, if current and future claims differ from historical trends, our estimated reserves for insured claims may be significantly affected. Our insurance reserves are not discounted. We believe our insurance reserves are adequate to cover projected costs for claims that have been reported but not paid and for claims that have been incurred but not reported. Due to the considerable variability that is inherent in such estimates, there can be no assurance that the ultimate liability will not exceed management's estimates. If actual results are not consistent with our assumptions and judgments, we may be exposed to gains or losses that could be material.
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