Addus HomeCare Corporation — 2017 Form 10-K
Business context and reporting period. This is the annual report for the fiscal year ended December 31, 2017, not a standalone fourth-quarter filing. Addus provides non-medical personal care services, primarily in consumers’ homes. At year-end it served more than 34,000 consumers across 24 states through 116 offices. The company reports one business segment.
Financial performance and condition
- Revenue: $425.7 million, up 6.2% from $400.7 million in 2016. Average billable census rose 4.1%, revenue per billable hour increased 2.9%, and billable hours grew 3.2%.
- Profit and margins: Gross profit was $115.6 million, with gross margin improving to 27.2% from 26.5%. Operating income was $26.2 million (6.2% margin), versus $15.2 million (3.8%) in 2016. Net income was $13.6 million, up from $12.0 million; diluted EPS was $1.17 versus $1.06. Adjusted EBITDA, a non-GAAP measure, was $36.8 million versus $32.1 million.
- Cash flow: Operating cash flow was $52.8 million, compared with $0.7 million used in 2016, largely reflecting collection of overdue Illinois receivables. Investing used $24.3 million and financing provided $17.2 million. Cash increased by $45.7 million to $53.8 million.
- Liquidity and debt: Year-end accounts receivable, net, was $89.0 million, down from $117.0 million; current assets were $151.1 million and current liabilities $52.2 million. Term loans were $44.4 million and capital leases $1.0 million. The company reported $105.1 million of borrowing availability under its credit facility and compliance with its covenants. The $250 million facility matures in five years.
- Other balance-sheet items: Total assets were $267.1 million and stockholders’ equity $175.1 million. Goodwill and intangible assets totaled $106.9 million.
Material changes versus 2016
- Revenue growth moderated to 6.2% from 19.0% in 2016; 2016’s increase included a substantial contribution from the South Shore acquisition. In 2017, acquisitions contributed $8.6 million of revenue growth, while earlier acquisitions also contributed.
- Gross margin improved, which management attributed chiefly to lower direct service costs for benefits, mileage and unemployment taxes and exiting lower-margin adult day services. General and administrative expense was nearly flat in dollars but fell to 18.1% of revenue from 19.2%, partly as restructuring and severance costs declined.
- Illinois collections materially improved: the Illinois receivable balance fell from $69.3 million to $37.9 million, and company-wide DSO declined from 104 to 73 days. However, the allowance for doubtful accounts increased to $10.5 million from $7.4 million, equal to 10.6% of gross receivables versus 5.9%.
- Managed care organizations rose to 33.1% of revenue from 26.1%; state, local and other government programs declined to 64.2% from 70.4%. Illinois Department on Aging revenue concentration fell to 36.6% from 42.1%.
- The company replaced its prior credit facility in May 2017 and acquired Options Home Care in New Mexico for $22.6 million and Sun Cities in Arizona for approximately $2.3 million. It also exited adult day services and sold its remaining 10% interest in two home-health joint ventures.
Outlook, risks and unusual items
- Management described growth opportunities from aging demographics, home-based care and increasing Medicaid managed-care enrollment, and expected more referrals from managed-care organizations. The filing gives no quantitative revenue, earnings or margin guidance.
- Subsequent to year-end, Addus acquired LifeStyle Options for approximately $3.4 million and agreed to acquire Ambercare for approximately $40 million, with completion expected in the second quarter of 2018, subject to closing conditions. Ambercare was expected to be funded through the delayed-draw term loan facility.
- Key risks include dependence on government reimbursement and budgets, concentration in Illinois (52.6% of revenue), and reliance on the Illinois Department on Aging as a major payor. Delayed state payments could pressure liquidity; Illinois had experienced budget delays, although it enacted a fiscal 2018 budget and prior delayed payments began arriving in July 2017.
- Other material risks include reimbursement-rate or eligibility changes, managed-care contract and authorization transitions, wage and labor costs (60.4% of employees were union-represented), workforce availability, regulatory and billing compliance, audits, litigation, acquisition integration, cybersecurity and variable-rate debt.
- Effective tax rate rose to 39.0% from 25.2%, including a 5.3 percentage-point impact from the 2017 Tax Reform Act’s deferred-tax revaluation. The company recognized a provisional $0.9 million tax expense and a $0.3 million valuation allowance; it expected the lower 21% federal corporate rate effective in 2018 to benefit future years.
- Unusual items include a $2.467 million gain on asset sales, $1.3 million write-off of old debt issuance costs, and $1.7 million of restructuring costs. A False Claims Act/Illinois False Claims Act qui tam suit related to alleged referrals remains pending; the government declined to intervene, and Addus said it would defend the case and did not expect a material adverse effect.
- The filing discloses immaterial prior-period financial-statement corrections, including a cumulative $1.2 million reduction to retained earnings for errors originating in earlier years. Management and the auditor concluded internal control over financial reporting was effective at year-end; the acquired Sun Cities business was excluded from management’s assessment.
Important facts for investors to verify
- Whether Illinois and other government payors maintain timely payments, and whether receivables aging, DSO and the higher doubtful-account reserve improve or deteriorate.
- Whether managed-care growth offsets changes in government program reimbursement, service authorizations and the company’s concentrated Illinois exposure.
- Whether reported operating improvement is sustained after considering acquisitions, asset-sale gains, restructuring adjustments and the company’s definition of Adjusted EBITDA.
- Final Ambercare acquisition terms, funding, closing and integration results, as well as performance of the Options Home Care and Sun Cities acquisitions.
- Developments in the pending qui tam litigation and any remaining indemnification exposure for the divested home-health business, including the estimated $0.2 million of potential Medicare billing adjustments.
- Effects of tax-law implementation, variable interest rates and credit-facility covenants on future earnings and acquisition capacity.