Addus HomeCare Corporation — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. This is an annual filing, not a standalone fourth-quarter report; quarterly figures are identified separately below. Amounts are in U.S. dollars unless noted.
Business context and reporting period
Addus provides primarily non-medical personal care services in consumers’ homes, serving elderly, chronically ill and disabled people. At year-end it served over 33,000 consumers through 114 locations in 24 states and operated three adult day services centers in Illinois. The company reports one continuing operating segment. It subsequently sold the adult day centers effective March 1, 2017.
Financial and operating metrics
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Net service revenue | $400.7 million | $336.8 million |
| Gross profit / gross margin | $106.1 million / 26.5% | $91.3 million / 27.1% |
| Operating income / operating margin | $15.2 million / 3.8% | $16.0 million / 4.8% |
| Net income | $12.0 million | $11.6 million |
| Net income from continuing operations | $11.9 million | $11.4 million |
| Adjusted EBITDA (non-GAAP) | $32.1 million | $23.6 million |
| Net cash from (used in) operating activities | $(0.7) million | $4.1 million |
| Cash at year-end | $8.0 million | $4.1 million |
| Debt, including capital leases, before debt issuance costs | $26.5 million | $3.0 million |
| Accounts receivable, net | $117.0 million | $85.0 million |
| Total assets | $231.0 million | $185.8 million |
Revenue grew 19.0%; average billable census increased 3.6%, billable hours rose 18.1%, and revenue per billable hour increased 0.8% to $17.35. Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP earnings or cash flow.
FY 2016 cash used in investing activities was $21.7 million, principally including $20.0 million for the South Shore acquisition. Financing activities provided $26.4 million. The $100 million revolving facility also included delayed-draw term capacity and an uncommitted incremental term loan option; reported availability at year-end was $79.7 million. The company reported covenant compliance.
Fourth-quarter context: For the quarter ended December 31, 2016, revenue was $103.7 million, operating income from continuing operations was $7.7 million, net income from continuing operations was $7.5 million, and total net income was $7.6 million.
Material changes versus the prior comparable period
- Revenue increased $63.9 million, largely reflecting $51.7 million from the South Shore acquisition; the filing also attributes growth to higher census and slightly higher revenue per billable hour.
- Gross margin declined from 27.1% to 26.5%, primarily because South Shore was a lower-margin business. Operating margin fell from 4.8% to 3.8% as operating expenses grew faster than gross profit.
- Net income increased 3.5%, while operating income declined 4.9%. Adjusted EBITDA increased to $32.1 million from $23.6 million.
- Operating cash flow shifted from $4.1 million provided to $0.7 million used, principally due to receivables growth and delayed Illinois payments. Net receivables rose 37.7%; days sales outstanding increased to 104 days from 92.
- Managed care organizations increased to 26.1% of revenue from 18.3%; state, local and other government programs declined to 70.4% from 77.7%. The Illinois Department on Aging remained the largest single payor, at 42.1% of revenue versus 48.8%.
Outlook, commentary, risks and unusual items
- Management outlook: The filing provides no numerical revenue or earnings guidance. Management’s strategy emphasizes organic growth, managed-care relationships, acquisitions and expansion into new markets. It stated that cash and available credit were expected to cover working-capital needs for at least the next 12 months.
- Illinois payment exposure: Illinois had not adopted a comprehensive FY 2017 budget at filing time. The company reported $53.0 million of delayed Illinois Department on Aging receivables at year-end and warned that further delays could pressure liquidity and increase borrowings. Illinois governmental receivables overall were $69.3 million gross; the filing’s $53.0 million figure is specifically the delayed Department on Aging balance.
- Unusual income and costs: FY 2016 included $2.8 million of Illinois prompt-payment interest income, recognized when received, and approximately $8.0 million of pretax streamlining, restructuring and severance costs. Management expected some additional restructuring costs, with amount and timing undetermined.
- Concentration and reimbursement risks: Illinois represented 53.6% of revenue and the Illinois Department on Aging 42.1%. Government budget deficits, rate reductions, service eligibility or authorization changes, managed-care contracting and payment delays could affect revenue, collections and margins.
- Other risks and contingencies: About 66.1% of employees were union-represented; labor costs, wage rules and contract negotiations are significant risks. A False Claims Act/Illinois False Claims Act case involving alleged kickbacks and referrals remained pending; the company intended to defend it and believed it would not have a material adverse effect. The company also retained indemnification exposure for certain pre-sale home-health claims, with an estimated $0.4 million of potential billing adjustments noted.
- Debt and operating constraints: Variable-rate borrowings expose the company to interest-rate changes; a 100-basis-point increase was estimated to reduce 2016 net income by $0.2 million. Credit agreements include financial covenants and limits on certain acquisitions, dividends and other actions.
- Controls and audit: Management reported that a material weakness identified in 2015 was remediated in 2016, and the auditor gave an unqualified opinion on internal control over financial reporting. South Shore was excluded from management’s and the auditor’s internal-control assessment due to acquisition timing.
- Subsequent events: The company drew an additional $20 million on its revolving facility in January and February 2017. It sold the adult day services assets in March 2017 for approximately $2.4 million and reported an estimated gain of approximately $2.1 million.
Important facts for investors to verify
- Whether Illinois budget funding and collections improved, including recovery and aging of the $53.0 million delayed Department on Aging receivable and the $69.3 million gross Illinois governmental receivable balance.
- Whether operating cash flow recovered and receivable days sales outstanding declined from 104 days, particularly for the Illinois Department on Aging, at 152 days.
- South Shore’s ongoing revenue contribution and profitability, and whether acquisition-related growth can be sustained without further margin dilution.
- The composition and recurrence of restructuring and severance costs, and the realized proceeds and gain from the adult day services sale.
- Developments in the pending False Claims Act litigation and the company’s remaining indemnification exposure for historical home-health claims.
- Post-year-end revolver borrowings, covenant headroom, variable-rate debt costs and compliance with lender restrictions.
- Progress integrating South Shore into financial controls and systems, given its exclusion from the 2016 internal-control assessment.