Addus HomeCare Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. Unless otherwise noted, financial amounts below are in millions of dollars. The company provides home and community-based personal care services, primarily to elderly, chronically ill and disabled consumers, through 128 locations in 23 states. Results are reported as one operating segment.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Continuing-operations service revenue | $71.7 | $63.0 |
| Gross profit / margin | $18.7 / 26.0% | $15.8 / 25.1% |
| Operating income / margin | $3.8 / 5.3% | $3.7 / 5.9% |
| Income from continuing operations | $2.4 | $2.7 |
| Net income | $2.4 | $13.3 |
| Operating cash flow | $2.7 | $13.0 |
- Revenue increased 13.8%. Average billable census grew 14.3%, including 8.0% same-store growth and 6.3% attributed to acquisitions. Revenue per billable hour was $16.92 versus $16.96.
- Cost of services was 74.0% of revenue versus 74.9%; management attributed improved gross margin to lower-than-anticipated workers’ compensation and unemployment tax costs and higher-margin acquisitions.
- General and administrative expense rose 25.1% to $14.4 million, increasing to 20.1% of revenue from 18.3%. The company cited acquisition expenses, legal and consulting fees, and personnel costs.
- The effective tax rate on continuing operations rose to 34.9% from 24.0%; 2013 benefited from a one-time employment tax credit adjustment.
- Cash was $17.0 million at quarter-end, up from $15.6 million at year-end 2013. Net accounts receivable was $59.0 million; current assets were $89.1 million and current liabilities $42.6 million. Total assets were $162.5 million and stockholders’ equity $116.5 million.
- There was no long-term debt or revolving credit balance. The $55 million revolving facility had $42.6 million available, subject to borrowing-base limits; the company reported covenant compliance. Investing cash outflow was $1.5 million, principally property and equipment purchases.
Changes and business context
Continuing-operations revenue and operating income increased, but continuing-operations net income declined 12.4%, to $2.4 million. Reported net income fell 82.2% year over year mainly because Q1 2013 included $10.6 million of after-tax discontinued-operations earnings, including the gain on sale of the home health business. Q1 2013 also included $6.5 million of discontinued-operations revenue; there was no such revenue in Q1 2014. Operating cash flow fell to $2.7 million from $13.0 million, which management attributed primarily to less favorable working-capital cash movements.
The company completed acquisitions of home and community-based agencies in Tennessee and Ohio in January 2014. Management described the prior sale of substantially all of the home health business as enabling greater focus on its growing, profitable continuing operations and improving liquidity and capital structure.
Outlook, risks and unusual items
- Management stated that cash and expected operating cash flow, together with available credit, should meet working-capital needs for at least the next 12 months. It had received a commitment letter to renew the credit facility for five years on essentially similar terms; renewal was not reported as executed.
- Illinois payment delays continued. The Illinois Department on Aging accounted for 55.1% of Q1 2014 continuing-operations revenue. Illinois governmental receivables were $43.7 million at March 31, compared with $44.4 million at December 31, 2013; management warned delays could pressure liquidity and increase borrowing needs.
- Governmental programs represented 95.4% of continuing-operations revenue, and Illinois represented 61.5%. Reimbursement, state budgets, Medicaid rules, authorized service hours and payor concentration are significant exposures. Management also anticipated a shift toward managed-care organizations and said it was pursuing those relationships and private-duty business.
- In connection with the home health business sale, the company is responsible for certain pre-sale Medicare and Medicaid billing adjustments. After identifying documentation errors, it voluntarily remitted $1.84 million in March 2014 and recorded an estimated $1.855 million for remaining billing adjustments.
- Disclosure controls were deemed ineffective at quarter-end because two previously identified material weaknesses had not been fully remediated: information-technology access, segregation-of-duties and change-management controls, and payroll-process controls. Management reported remediation work underway and additional financial-statement procedures.
- The company reported no material change to the risk factors in its 2013 Form 10-K. Management said ordinary-course legal proceedings were not expected to materially affect financial position or results.
Important facts for investors to verify
- Whether the credit-facility renewal was executed before the existing facility’s November 2014 expiration, and whether availability and covenants remain adequate.
- Collection timing and aging of Illinois receivables, including the effect of continued state payment delays on cash flow and borrowing needs.
- The final amount and resolution of the Medicare and Medicaid billing adjustments, including the adequacy of the recorded reserve.
- Progress in remediating the disclosed material weaknesses and whether disclosure controls are subsequently deemed effective.
- Whether census growth, acquisition integration and gross-margin gains can continue while G&A expense growth and payor concentration are managed.