Addus HomeCare Corporation (10-Q) — Quarter Ended September 30, 2020
Business context: Addus provides personal care, hospice and home health services across 24 states through 193 offices. Its payors include government programs, managed care organizations, Medicare, insurers and private clients. The filing compares the three and nine months ended September 30, 2020 with the corresponding 2019 periods; 2019 figures were revised for previously identified immaterial errors.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net service revenue | $194.0m | $169.0m | $568.8m | $456.4m |
| Gross profit / margin | $56.3m / 29.0% | $45.2m / 26.7% | $167.1m / 29.4% | $121.7m / 26.7% |
| Operating income / margin | $12.5m / 6.4% | $7.3m / 4.3% | $32.8m / 5.8% | $20.2m / 4.4% |
| Net income | $9.1m | $4.9m | $24.7m | $14.5m |
| Diluted EPS | $0.57 | $0.35 | $1.55 | $1.06 |
Revenue increased 14.8% in Q3 and 24.6% year to date. Management attributed growth to same-store expansion, higher revenue per billable hour, and acquisitions—especially Hospice Partners, acquired in October 2019. Personal care’s average billable census declined 1.9% in Q3 and 2.1% year to date, partly offsetting rate and volume gains. Hospice grew substantially with acquisitions; home health revenue declined 6.4% in Q3, with management citing COVID-related restrictions in New Mexico.
Cash flow and liquidity: Nine-month operating cash flow was $73.3m, versus $8.1m in 2019, primarily reflecting lower receivables and improved collections, alongside growth and acquisitions. Investing cash outflow was $17.5m (including $11.9m for acquisitions); financing cash inflow was $2.8m. Cash was $170.3m at September 30, up from $111.7m at year-end. Net accounts receivable was $118.6m, down from $149.7m; days sales outstanding fell to 56 from 72.
Long-term debt, net of issuance costs and current maturities, was $59.6m; current debt was $2.1m. The company reported approximately $219.0m of additional borrowing availability, $9.3m of letters of credit and compliance with credit-facility covenants. Credit-facility borrowings had a 1.89% interest rate. The facility matures in May 2023. Total assets were $695.4m and stockholders’ equity was $507.6m.
Material changes and notable items
- Gross margin expanded year over year, which management attributed mainly to the contribution of acquired, relatively higher-margin businesses. G&A rose 16.1% in Q3 and 33.3% year to date; as a share of revenue it was 21.0% in Q3 and 22.0% year to date.
- Hospice revenue was $24.0m in Q3 and $73.7m year to date, compared with $10.9m and $27.2m, respectively, in 2019. Hospice segment operating income was $7.6m in Q3 and $21.3m year to date. Home health segment operating income declined to $0.5m in Q3 and $0.8m year to date.
- The company acquired A Plus Health Care on July 1, 2020, for approximately $14.5m including acquired excess cash, expanding personal care in Montana. On November 1, 2020, it acquired County Homemakers for approximately $14.6m in cash, expanding in Pennsylvania.
- Operating lease liabilities rose to $42.0m from $21.5m at year-end, including the effect of an 11-year headquarters expansion lease.
- Management revised prior-period statements to correct immaterial errors, primarily involving estimates of implicit price concessions and an understated receivables allowance. The filing says prior statements were not materially misstated; 2019 comparative figures in this report reflect the revisions.
Outlook, risks and contingencies
The filing provides no specific earnings or revenue guidance. Management said the pandemic’s ultimate effects were not reasonably predictable. COVID-related costs were approximately $2.5m in Q3 and $4.8m year to date, partly offset by temporary personal-care rate increases of $1.8m and $3.6m, respectively. A further $3.0m of COVID-related payor reimbursements was recorded as deferred revenue pending related expenses. The company returned $6.9m of automatically distributed federal provider grants and deferred $7.1m of employer payroll taxes under the CARES Act.
- State budget pressure, reimbursement changes and potential rate reductions could affect results, particularly in Illinois, New York and New Mexico. Illinois represented 37.8% of nine-month revenue; the Illinois Department on Aging accounted for 23.1% of nine-month revenue and 18.5% of net receivables at quarter-end.
- Government and Medicare programs are significant payors; hospice revenue was 92.8% Medicare for the first nine months. The company also identified caregiver recruitment and retention, wage pressures, acquisition integration, and managed-care payment and policy changes as risks.
- Management reported disclosure controls and procedures were not effective at September 30, 2020 because previously identified material weaknesses in internal control over financial reporting remained unremediated. Remediation work continued, including enhanced controls over hours billed and receivables estimates.
- Management considered pending legal and administrative proceedings unlikely to have a material effect. Variable-rate debt creates interest-rate exposure; the filing estimates a 100-basis-point rate increase would have reduced nine-month net income by $0.4m.
Investor verification priorities
- Assess how much revenue and margin growth came from acquired operations versus same-store performance, and whether acquired-business profitability is sustainable.
- Verify receivables quality, collection trends and the assumptions used for implicit price concessions, especially given the prior-period revision and Illinois payor concentration.
- Track progress in remediating the disclosed material weaknesses and whether controls become effective after sustained testing.
- Monitor COVID-related costs and reimbursements, state budget and reimbursement actions, wage pressures, and any effect on service volumes or caregiver availability.
- Review post-quarter County Homemakers acquisition accounting and funding, as well as remaining leverage, covenant headroom and available credit capacity.