Addus HomeCare Corporation — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; balance sheet compared with December 31, 2012. Amounts below are in millions of dollars unless stated otherwise.
Business context
Addus provides home and community-based personal care, primarily through government-funded programs. At September 30, it operated 94 locations in 21 states and served more than 26,000 consumers. Effective March 1, 2013, it sold substantially all of its home health business to LHC Group, retaining 10% interests in certain California and Illinois operations. Home health results are reported as discontinued operations.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Continuing-operations revenue | $67.3 | $61.2 | $196.1 | $180.5 |
| Gross profit / margin | $17.2 / 25.6% | $15.7 / 25.6% | $49.6 / 25.3% | $46.5 / 25.8% |
| Operating income / margin | $4.3 / 6.3% | $3.9 / 6.3% | $12.0 / 6.1% | $10.4 / 5.8% |
| Continuing-operations net income | $2.8 | $2.2 | $8.0 | $5.8 |
| Net income (including discontinued operations) | $2.6 | $1.8 | $18.3 | $3.9 |
| Diluted EPS | $0.23 | $0.16 | $1.66 | $0.36 |
Q3 continuing revenue grew 10.0%; management attributed the increase primarily to higher average census (up 12.1%) and billable hours (up 11.9%). Nine-month revenue rose 8.6%, with average census up 11.5% and billable hours up 11.0%. Nine-month gross margin declined 0.5 percentage points, which management attributed to higher field labor costs. General and administrative expense was $12.4 million in Q3 and $36.0 million for nine months; as a share of revenue it was 18.5% and 18.4%, respectively.
- Discontinued operations: Nine-month results included an $11.1 million after-tax gain on the home health sale and a $0.9 million after-tax operating loss. The sale generated $19.7 million of net cash proceeds; the reported pre-tax gain was $18.8 million.
- Cash flow: Nine-month operating cash flow was $25.1 million, versus $9.3 million in 2012; investing provided $19.1 million, largely from sale proceeds, while financing used $16.5 million, mainly for debt repayment. Cash increased to $29.5 million from $1.7 million at year-end 2012.
- Liquidity and debt: Accounts receivable, net, was $54.5 million, down from $71.3 million at year-end. Total liabilities were $43.9 million and stockholders’ equity was $112.8 million. No borrowings were outstanding at September 30; revolving-credit availability was $42.6 million after letters of credit. The $55 million facility expires November 2, 2014; the company reported covenant compliance.
Outlook, risks and notable items
- Management stated that cash, operating cash flow and available credit were expected to cover working-capital needs for at least 12 months and support selected acquisitions, subject to lender consent. No specific earnings or revenue guidance was provided.
- Illinois was the largest concentration: one Illinois state agency represented 58.9% of Q3 and 59.1% of nine-month continuing revenue. Government programs supplied 94% of continuing revenue. Illinois receivables improved during the period, but management cautioned that delayed payments continued, expected receivables and days sales outstanding to rise again, and warned this could pressure liquidity and increase borrowing needs.
- The home health sale agreement requires indemnification for certain pre-closing healthcare-law and reimbursement matters. No reserve had been recorded because the company could not yet estimate the likelihood or amount; management expected to be positioned to establish a reserve in Q4 2013. Medicare claims may be subject to review generally for six years, potentially ten in certain circumstances.
- Two announced private-duty/personal-care acquisitions—in South Carolina, Tennessee and Ohio, and in New Mexico—were projected to represent $20–$22 million in aggregate annual revenue. They remained subject to closing conditions; the filing gave no assurance they would be completed.
- A November 2013 shelf registration, once effective, could permit offerings of up to $150 million of securities; the company said it had no specific issuance plans. The filing also discussed state Medicaid funding and reimbursement risks, healthcare regulation, and new federal minimum-wage/overtime rules for direct-care workers effective January 1, 2015, whose impact was still being evaluated.
Important facts for investors to verify
- Whether Illinois and other state payors sustain timely reimbursements, and how receivables, DSO and borrowing needs develop.
- Whether the company establishes a reserve for sale-related indemnification obligations, and the eventual amount.
- Whether the announced acquisitions close, their purchase terms and realized contribution to revenue and earnings.
- The effect of direct-care wage and overtime requirements, Medicaid policy changes and reimbursement rates on labor costs and margins.
- Ongoing concentration in government payors and Illinois, as well as the credit facility’s availability, covenants and any amendment following the home health sale.