Addus HomeCare Corporation — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures below are for Q4 2018 where provided. Dollar amounts are in millions unless otherwise noted.
Business context
Addus provides in-home personal care, hospice and home health services, largely to older adults and other people needing assistance. At year-end, it served more than 39,000 consumers in 24 states through 156 offices. 2018 was the first year it reported hospice and home health as separate segments, following its acquisition of Ambercare in May.
Financial and operating performance
| Metric | 2018 | 2017 | Change or context |
|---|---|---|---|
| Net service revenue | $518.1 | $426.0 | Up 21.6%; acquisitions and higher personal-care census contributed. ASC 606 reduced reported revenue by $9.7 compared with the prior presentation. |
| Gross profit / margin | $138.3 / 26.7% | $115.9 / 27.2% | Profit increased; margin declined. |
| Operating income / margin | $24.3 / 4.7% | $26.4 / 6.2% | Operating income declined 7.8%. |
| Net income | $17.5 | $13.7 | Up 27.9%; diluted EPS was $1.41 versus $1.17. |
| Adjusted EBITDA | $43.9 | $36.9 | Up 19.1%; non-GAAP measure as defined by the company. |
| Operating cash flow | $33.2 | $52.8 | Lower than 2017, which benefited from collection of prior-period Illinois receivables. |
| Cash at year-end | $70.4 | $53.8 | Accounts receivable, net, was $108.0. |
| Debt | $20.0 revolving borrowings | $44.4 term borrowings | Debt carrying value, net of issuance costs and including capital leases, was $17.3. |
Q4 2018 revenue was $139.7, gross profit $37.8, operating income $6.8 and net income $4.7 (including $0.1 from discontinued operations). Q4 2017 revenue was $112.0 and net income $3.1.
Personal care generated $492.4 of 2018 revenue and $82.4 of segment operating income. Hospice contributed $18.9 of revenue and $5.1 of segment operating income; home health contributed $6.9 and $0.7, respectively. These acquired segments operated in New Mexico during the reported period.
Cash used in investing activities was $67.8, mainly for acquisitions; cash from financing activities was $51.2, including net proceeds of $76.6 from the company’s share offering. The amended credit facility totals $269.6, matures in 2023, and had $142.9 available to borrow at year-end, subject to its terms and borrowing limits.
Material changes versus the prior period
- Revenue growth reflected the Ambercare and Arcadia acquisitions, increased average personal-care billable census, and higher revenue per billable hour. Personal-care billable hours rose 13.0%; revenue per billable hour increased 2.4%.
- Acquisitions added hospice and home health and expanded personal care. Management reported $75.2 of 2018 revenue growth from acquisitions completed during 2018.
- General and administrative expense rose 36.6% to $105.0, reflecting acquired operations, higher administrative compensation, acquisition costs and rent.
- ASC 606 adoption moved most amounts previously classified as doubtful-account expense into a reduction of revenue. The company reported $9.7 of such revenue reduction; the change affects comparisons of revenue, margins and expense classifications.
- The effective tax rate fell to 20.6% from 39.0%, while interest income included $2.3 of Illinois prompt-payment interest received. These items helped net income rise despite lower operating income.
- Illinois represented 47.5% of total revenue, down from 52.6%; the Illinois Department on Aging alone accounted for 31.0%, down from 36.5%.
Outlook, risks, contingencies and unusual items
- Outlook: Management cited potential personal-care demand from Medicare Advantage supplemental benefits, effective in 2019, and described this as an opportunity over the next three to five years. It expected an Illinois reimbursement increase to help offset Chicago wage increases, potentially in the first half of 2019; this was an expectation, not a commitment. The company expected to complete its planned $28.0 VIP Health Care Services acquisition in Q2 2019, subject to regulatory approvals.
- Concentration and reimbursement: Dependence on Illinois, state and federal program funding, managed-care contracts and reimbursement rates exposes results and cash collection to budget decisions, rate changes, eligibility limits and payment delays. Illinois receivables fell to $24.3 from $37.9, but future budget or payment delays could affect liquidity.
- Labor and regulation: Labor is a major cost; about 49% of employees were union-represented. Minimum-wage increases, staffing availability, EVV requirements and extensive healthcare compliance obligations may increase costs or constrain operations.
- Internal controls: Management and the auditor identified a material weakness involving controls over review and approval of hours worked and billed, because the preferred EVV vendor had not provided a SOC 1 Type 2 report and existing review controls lacked sufficient precision. Management said the financial statements fairly present results, and the auditor issued an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting. Remediation plans included pursuing the vendor report and strengthening controls.
- Prior-period corrections: The company corrected prior-period errors involving revenue, doubtful accounts and payor overpayments. It said prior-year effects were immaterial individually, but correcting the cumulative effects in the current year would have been material; comparative statements were revised. The corrections included a cumulative $1.2 understatement of net income and equity and $3.1 of payor overpayments reclassified from receivables to payables.
- Legal matter: A qui tam lawsuit alleges False Claims Act and anti-kickback violations involving referrals to a home health business largely sold in 2013. The court narrowed the case in 2018 to claims concerning home health services at three Illinois senior living facilities. The government declined to intervene; the company intends to defend the case and believes it will not have a material adverse effect.
- Other exposures: Hospice Medicare payment caps, audits and recoupments, acquisition integration, variable interest rates, cybersecurity and privacy compliance, and potential legacy liabilities under sale indemnities are identified risks. No hospice cap liability was recorded for 2018. A 100-basis-point increase in variable rates was estimated to reduce 2018 net income by $0.6.
Investor facts to verify
- Whether organic growth and acquired revenue can sustain growth while margins recover from the 2018 decline.
- Progress in remediating the EVV-related material weakness and results of testing the strengthened controls.
- Illinois reimbursement, wage offsets, budget stability, receivable aging and customer concentration.
- Integration and performance of Ambercare, Arcadia and other acquisitions, including the expected VIP transaction.
- Credit-facility covenant headroom, variable-rate exposure, and the quality and collectability of receivables after ASC 606 adoption.
- Developments in the False Claims Act litigation and any regulatory, audit or indemnification liabilities.