Apria Healthcare Group Beats On Bad Debt Reserves

May. 1.07 | About: Apria Healthcare (AHG)

Apria Healthcare (AHG) reported earnings:

For the quarter ended March 31, 2007, revenues were $389.3 million, which represents a 5.8% increase compared to revenues of $368.1 million in the first quarter of 2006. First quarter 2007 net income was $19.1 million, an increase of 18.7% from $16.1 million in the first quarter of 2006. Current quarter diluted earnings per share were $0.44 compared to $0.38 diluted earnings per share, a 15.8% increase over the comparable prior year period.

Analysts were expecting $0.43 on $392 million in sales. According to the company:

The provision for doubtful accounts as a percentage of net revenue was 2.5%, compared to 2.8% in the comparable period last year. Days sales outstanding [DSO] were 49 days at March 31, 2007, down from 56 days at March 31, 2006. This improvement is a direct result of increased cash collections resulting from initiatives to optimize billing processes and to increase patient co-payments.

As we have noted before, the provision for doubtful accounts is an area many investors monitor for potential earnings management. Taking a lower provision increases earnings in the current period, while taking a higher one may indicate that the previous quarters were under-reserved.

In Apria’s case, if Apria had reserved 2.8% of sales, as they did last year, the earnings would only have met rather than exceeded estimates. It is worth noting, but would be even more noteworthy if the reserve had meant the difference between meeting and missing the target. Apria certainly doesn’t bury the fact that the reserve made a contribution, saying:

The incremental improvements in bad debt expense and DSO are particularly notable because these metrics are traditionally higher in the first quarter due to a significant industry-wide volume of payer changes and deductibles.

Indeed, for many companies the provision is determined by evaluating receivables according to age and other factors that could indicate non-recoverability, and improvement in those factors really does mean improving operations for the firm. So given that Apria is being open about the contribution and that it didn’t help the company avoid missing estimates, we’re inclined to give them the benefit of the doubt for now.

As with any tool, simply monitoring bad debt provisions can lead to misleading results if not used properly.

AHG 1-yr chart:

AHG 1-yr chart