We rate Healthways ( HWAY) a HOLD. Our rating is supported by the company's top-line growth and higher earnings countered by its weak cash and liquidity position. Although the margins and returns are improving, rising expenses along with mounting debt may negatively impact the company's performance in the upcoming quarters.
-- Rising expenses and debt. The cost of services increased 3.9% to $129.05 million from $124.19 million while selling, general and administrative expenses edged up 6.5% to $17.95 million from $16.85 million. Furthermore, total debt for the quarter spiked 6.4% to $307.10 million from $288.72 million deteriorating the debt-to-equity ratio to 0.84 from 0.75.
Healthways' cash and cash equivalents plunged 92.0% to $4.35 million from $54.53 million. Net operating cash flow declined 15.0% to $21.65 million when compared to the same quarter last year. Return on assets increased 123 basis points to 6.37% from 5.14%. Similarly, return on equity advanced 377 basis points to 15.33% from 11.56% a year ago. Total debt for the quarter spiked 6.4% to $307.10 million from $288.72 million. Stockholders' equity declined 4.7% to $366.75 million from $384.66 million. Therefore, the debt-to-equity ratio deteriorated to 0.84 from 0.75. Moreover, the company has a quick ratio of 0.75 which shows its inability to meet short-term cash requirements. During the quarter under review, Healthways signed a new agreement wit a Fortune 100 company to provide comprehensive Health and Care Support solution for more than 90,000 employees and dependents. Also, the company launched new senior solution for the Medicare Advantage population of a large Blue Cross Blue Shield Plan. The company also announced the appointment of Mr. Brueckner to serve as President and Chief Operating Officer. Recently, the company signed a five-year agreement with the Hospitals Contribution Fund of Australia Limited (HCF) to offer comprehensive Health and Care Support solution. Looking forward to FY09, the company expects run rate revenue to decline by approximately $90.00 million to $100.00 million over FY08 which would in turn lead to an increase in cost of services and/or selling, general and administrative expenses as a percentage of revenue. In addition, the company also anticipates higher legal expenses.