Addus HomeCare Corporation — 2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual filing, not a standalone fourth-quarter report; selected unaudited Q4 results are included below. Unless stated otherwise, amounts are in millions of dollars.
Business context
Addus provides primarily non-medical home and community-based care to older adults and people with disabilities. At year-end, it served more than 26,000 consumers through 121 locations in 21 states. Approximately 94% of continuing-operations revenue came from government programs. Illinois was the largest concentration: the Illinois Department on Aging represented 58.8% of continuing-operations revenue.
Effective March 1, 2013, Addus sold substantially all of its home health business for approximately $20 million, retaining a 10% interest in operations in California and Illinois. The business was reported as discontinued operations. The company said the sale enabled it to focus on home and community-based services.
Financial performance and liquidity
| Metric | FY 2013 | FY 2012 |
|---|---|---|
| Continuing-operations revenue | $265.9 | $244.3 |
| Gross profit / gross margin | $67.7 / 25.5% | $64.1 / 26.2% |
| Operating income / operating margin | $15.5 / 5.8% | $15.7 / 6.4% |
| Continuing-operations net income | $11.2 | $9.3 |
| Net income, including discontinued operations | $19.1 | $7.6 |
| Adjusted EBITDA | $18.1 | $18.5 |
| Operating cash flow | $27.4 | $15.4 |
| Cash at year-end | $15.6 | $1.7 |
| Debt at year-end | None | $16.5 |
Revenue rose 8.9%, primarily as average billable census increased 6.8% and billable hours rose 8.7%; 2013 acquisitions contributed $1.7 million of continuing revenue. Gross margin declined 0.7 percentage points, which management attributed primarily to higher aide wages. Operating income was slightly lower despite higher revenue. Continuing-operations net income improved, while total net income also benefited from an $8.96 million after-tax gain on the home health sale. Adjusted EBITDA decreased modestly.
Operating cash flow increased year over year, with working-capital changes contributing to the improvement. Net accounts receivable was $61.4 million; the State of Illinois receivable balance was $45.1 million. The company reported $42.6 million available under its revolving facility, with approximately $12.4 million of letters of credit outstanding, and said it was compliant with covenants. The filing elsewhere states availability of $42.4 million, an inconsistency to verify. The $55 million facility was due to expire in November 2014; Addus reported receiving a commitment letter for a five-year renewal, not a completed renewal.
Fourth-quarter results and material changes
Unaudited Q4 2013 continuing revenue was $69.9 million, versus $63.8 million in Q4 2012. Q4 gross profit was $18.1 million versus $17.5 million; operating income was $3.5 million versus $5.3 million; and continuing-operations net income was $3.1 million versus $3.5 million. Q4 net income was $0.9 million versus $3.7 million, reflecting discontinued-operations losses of $2.2 million in Q4 2013 versus earnings of $0.2 million in Q4 2012.
The sale and debt repayment materially changed the company’s profile: Addus ended 2013 with no debt, higher cash, and one reported operating segment. It also completed acquisitions intended to expand existing markets and enter new ones, including a New Mexico business and acquisitions with additional agency closings in Tennessee and Ohio in January 2014.
Outlook, risks and unusual items
- No quantified revenue, earnings, or margin guidance is provided. Management’s stated strategy is to grow organically, pursue selective acquisitions, expand private-duty services, and develop relationships with managed-care organizations through its coordinated-care model.
- Cash collection remains a key risk. Addus cited delayed Illinois reimbursements and warned that further delays could impair liquidity and increase borrowing needs. Illinois accounted for about 59% of continuing revenue and 66% of receivables.
- Reimbursement levels, authorized service hours, eligibility rules, state budgets, and shifts to managed care or self-directed care could affect revenue and margins. The company also faces substantial regulatory, billing, audit, labor, staffing, and competition risks.
- Following an internal billing review, Addus estimated $3.244 million of Medicare billing adjustments and voluntarily remitted approximately $1.8 million to the government in March 2014. The company also has indemnification obligations relating to pre-sale home health claims and audits.
- Management identified material weaknesses in information-technology controls and payroll processes. Management and the auditor concluded internal control over financial reporting was not effective as of December 31, 2013; the auditor issued an adverse opinion on internal controls. Management described plans to engage consultants and implement a new payroll/HR system.
- The company reported approximately $60.0 million of goodwill and $8.8 million of intangible assets. No impairment was recorded in 2013; the filing notes future impairment remains possible. Severe weather in early 2014 could also affect first-quarter revenue.
Key facts for investors to verify
- Whether the credit-facility renewal was executed, and the actual borrowing availability given the filing’s $42.4 million versus $42.6 million disclosures.
- Subsequent resolution and remaining exposure from the estimated $3.244 million billing adjustments, the $1.8 million remittance, and home health sale indemnities.
- Progress in remediating the material weaknesses, including independent testing of IT and payroll controls.
- Illinois reimbursement timing, receivables and concentration trends, and any resulting effect on cash conversion and liquidity.
- Acquisition performance and integration, including the contingent consideration and the January 2014 agency closings.