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 payor 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.

With the end of the first quarter approaching, it is time to adjust the names in our Watch Lists. We will price all the new lists as of the close on Friday, March 30. Today we present our planned updates to the Mid Cap Watch List (Track at Marketocracy).

As with the Small Cap Watch List (Track at Marketocracy), we were surprised at the amount of turnover in our screens. Only 7 of the original 29 names made the cut for the new list (which comes in at only 24 names.) Part of the reason for the turnover was to reduce the overlap between the Small Cap and Mid Cap Watch List (Track at Marketocracy)s. Now there is only one-third overlapping names rather than two thirds. Furthermore, given the level of outperformance we saw in the first quarter (actually just two months) and the fact that much of those gains were achieved early, perhaps the turnover is warranted.

So without further ado, the names on the chopping block from the previous list are:

Silgan Holdings (SLGN - Annual Report); Middleby (MIDD); Olin (OLN); Vector Group (VGR); Sanderson Farms (SAFM); Tesoro (TSO); Downey Financial (DSL); Waddell & Reed (WDR); Gamco (GBL); Apria Healthcare (AHG); Quest Diagnostics (DGX); ITT Educational Services (ESI); Equifax (EFX); Delhaize Group (DEG); Papa John’s (PZZA); Rent-a-Center (RCII); Cato Corp (CTR); Dassault Systemes (DASTY); Ingram Micro (IM); Energy East (EAS); South Jersey Industries (SJI - Annual Report); and American States Water (AWR).

The new list is:

With the end of the first quarter approaching, it is time to adjust the names in our Watch Lists. We will price all the new lists as of the close on Friday, March 30. Today we present our planned updates to the Small Cap Watch List (Track at Marketocracy).

Frankly, we were surprised at the amount of turnover in our screens. Only 9 of the original 29 names made the cut for the new list (which comes in at only 24 names.) Still, given the level of outperformance we saw in the first quarter (actually just two months) and the fact that much of those gains were achieved early, perhaps the turnover is warranted.

So without further ado, the names on the chopping block from the previous list are:

Silgan Holdings (SLGN - Annual Report); Steel Dynamics (STLD - Annual Report); NVR (NVR - Annual report); Middleby (MIDD); Vector Group (VCG); Sanderson Farms (SAFM); Downey Financial (DSL); Waddell & Reed (WDR); Wilshire Bancorp (WIBC); Harrington West (HWFG); Gamco Investors (GBL); Apria Healthcare (AHG); Papa John’s (PZZA); Cato Corporation (CTR); Meredith Corporation (MDP); CSG Systems (CSGS); Energy East (EAS); Dynamics Research (DRCO); Ingram Micro (IM); and Dade Behring (DADE).

The new watch list will be:

Yes, we know it has only been two days since the Watch Lists were priced, but they were a nice two days. In fact, despite our complaints that some stocks were going up dramatically between the time we announced the watch list and the time we priced it, several names had nice earnings reports Wednesday night and got an immediate boost to their at-the-close official pricing.

The small cap watch list was up 1.31%, significantly better than the 0.50% and 0.58% posted by the Russell 2000 and S&P small cap indices over the two day period. The performance was driven by particularly strong results from Silgan (SLGN - Annual Report), Landstar (LSTR - Annual Report), Rent-a-Center (RCII) and NVR (NVR - Annual report). The worst performers were Vaalco Energy (EGY) and Apria Healthcare (AHG).

The mid-cap watch list turned in 1.58%, compared with just 0.46% for the S&P mid-cap. Due to significant overlap, the same names accounted for the gain. However, Vaalco is not in the mid-cap watch list so the second-worst performance came from Equifax (EFX).

The 0.49% return for the large cap watch list was also sufficient to beat the S&P 500’s 0.28%. Positive stocks were fairly evenly dispersed, but the performance was held back by poor returns from Freeport McMoRan (FCX - Annual Report), TJ Maxx (TJX) and Ricoh (RICOY.OB).

We’ll also continue to track the original all-cap watch list against the S&P 500 and our own portfolio. Embarrassingly, the only negative performance this week was our own portfolio.

We asked, but no one answered. So we are taking our own counsel and breaking our Watch List into three portfolios: Small Cap, Mid Cap and Large Cap. Each will be tracked against the relevant S&P index going forward from their collective inception date of January 31 (priced at the close of market trading that day.)

For your viewing pleasure, the Mid Cap Watch List (Track at Marketocracy) (to be measured against the S&P 400) follows.

Astute observers will notice a significant overlap between the names in the Small Cap Watch List and this one. In fact, of the 29 names on the Small Cap Watch List (Track at Marketocracy), 19 are included among the 29 names in the Mid Cap Watch List (Track at Marketocracy). The main reason is that we ran our screens against the criteria in the relevant indices rather than the names in the indices. Since the largest market cap in the S&P Small Cap is $3.5 billion and the smallest market cap in the S&P Mid Cap is $600 million, there is room for a good deal of overlap if one is willing to accept it.

In addition, we will provide a “quick and dirty” analysis of each name, with a goal of one such analysis per day. As the name implies, the quick and dirty analysis will be incomplete. We are hoping you will join in the debate and fill the gaps in our analysis.

We asked, but no one answered. So we are taking our own counsel and breaking our Watch List into three portfolios: Small Cap, Mid Cap and Large Cap. Each will be tracked against the relevant S&P index going forward from their collective inception date of January 31 (priced at the close of market trading that day.)

For your viewing pleasure, the Small Cap Watch List (Track at Marketocracy) (to be measured against the S&P 600) follows.

In addition, we will provide a “quick and dirty” analysis of each name, with a goal of one such analysis per day. As the name implies, the quick and dirty analysis will be incomplete. We are hoping you will join in the debate and fill the gaps in our analysis.