Addus HomeCare Corporation — Form 10-Q Summary
Business context and reporting period
Quarter ended June 30, 2018; comparisons are with the corresponding 2017 periods unless noted. Addus provides personal care, hospice and home health services. Following acquisitions, it operated in 25 states through 157 offices and served approximately 48,000 individuals in the six months, versus 42,000 a year earlier. The filing is unaudited.
Key financial metrics
Amounts are in millions, except per-share data and percentages.
| Metric | Three months ended June 30, 2018 | Six months ended June 30, 2018 |
|---|---|---|
| Net service revenue | $131.2; +26.7% | $240.7; +17.3% |
| Gross profit / margin | $35.7 / 27.2% | $63.6 / 26.4% |
| Operating income / margin | $6.9 / 5.3% | $11.5 / 4.8% |
| Net income | $4.3 | $9.2 |
| Diluted EPS | $0.36 | $0.78 |
| Cash provided by operating activities | Not separately provided | $20.2; prior year used $11.4 |
- Quarterly revenue increased from $103.6 million and net income from $2.7 million; diluted EPS was $0.23 in 2017. Six-month net income increased from $7.0 million and diluted EPS from $0.60.
- Six-month operating income declined from $12.9 million, despite revenue growth; 2017 included a $2.1 million gain on sale of adult day services assets.
- At June 30, cash was $69.2 million, accounts receivable net was $98.7 million, and total current assets and liabilities were $173.9 million and $56.3 million, respectively.
- Long-term debt, net of issuance costs and current maturities, was $99.4 million; total debt including current maturities was $101.9 million. Credit-facility term loans were $103.7 million at a 4.48% interest rate. Revolver availability was $90.4 million, and the company reported compliance with its covenants.
- Six-month investing cash use was $63.5 million, primarily reflecting acquisitions; financing provided $58.8 million. Cash increased $15.5 million to $69.2 million.
Material changes versus prior periods
- Growth reflected acquisitions and increased personal care activity. Personal care billable hours rose 17.0% in the quarter and 10.5% year to date; revenue per billable hour rose 3.3% and 3.5%, respectively.
- Arcadia was acquired April 1 for approximately $18.9 million; Ambercare was acquired May 1 for approximately $39.6 million plus approximately $12.0 million of excess cash. Lifestyle was acquired January 1 for approximately $4.1 million, including estimated contingent consideration. The acquisitions expanded personal care and added hospice and home health operations in New Mexico.
- Newly reported hospice and home health segments generated $4.6 million and $1.5 million of second-quarter revenue, respectively. Their segment operating income was $1.2 million and $0.08 million.
- Adoption of ASC 606 moved most amounts previously reported as doubtful-account expense into revenue as implicit price concessions: reductions to revenue were $2.3 million for the quarter and $4.3 million for the six months. Management said this presentation change reduced gross margin but did not change operating or net income.
- Six-month interest income included $2.3 million of Illinois prompt-payment interest; none was received in the second quarter. This produced net interest income of $0.06 million for the six months, compared with net interest expense of $2.7 million in 2017.
- The effective tax rate fell to 22.5% for the quarter and 20.5% for the six months, from 30.2% and 32.1%, respectively, largely reflecting the lower federal statutory rate enacted in 2017.
Outlook, risks and unusual items
- No specific financial guidance or quantified outlook is provided. Management described managed-care growth and acquisitions as growth opportunities, but cautioned that forward-looking results are subject to risks.
- Illinois Department on Aging revenue concentration remains significant: 30.4% of quarterly and 33.1% of six-month company revenue. The company had collected delayed prior-year payments, but future state budget or payment delays could pressure liquidity and increase borrowing needs.
- Chicago’s minimum wage increased to $12 per hour on July 1, 2018. A proposed state reimbursement pass-through was not included in Illinois’s fiscal 2019 budget; management hoped for a later increase but warned that its timing or passage was uncertain and that a gap could materially affect net income.
- Other risks include changes in government reimbursement and eligibility, labor costs and collective bargaining, integrating acquired businesses and their potential liabilities, and Medicare hospice payment caps. A False Claims Act case was narrowed in March 2018 to claims concerning home health services at three Illinois senior facilities; the government declined to intervene, and the company intends to defend the case.
- Management expects the forthcoming lease accounting standard to materially affect the balance sheet, but not liquidity. The company reported no material change to previously disclosed risk factors except for risks associated with expansion into hospice, home health and staffing.
Important facts for investors to verify
- How much of reported growth and profitability reflects acquired operations versus organic personal care growth, and how the new segments perform after integration.
- Whether Illinois payments remain timely and whether reimbursement increases offset wage inflation, particularly in Chicago.
- How acquisition funding, variable-rate debt, and the $90.4 million of revolver availability evolve; the filing estimates a 100-basis-point rate increase would reduce six-month net income by $0.3 million.
- Whether the $2.3 million of Illinois prompt-payment interest is recurring; the filing says further amounts, timing and payment intent remain uncertain.
- Progress and potential exposure in the False Claims Act litigation, Medicare hospice-cap compliance, and acquired-business contingencies.