Addus HomeCare Corporation — Q3 2015 Form 10-Q
Business context and reporting period
For the quarter and nine months ended September 30, 2015. Addus provides home- and community-based personal care and adult day services, primarily to elderly, chronically ill, and disabled people eligible for Medicare and Medicaid. It operated 122 locations in 21 states. Unless noted, dollar amounts below are in millions.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net service revenue | $84.331 | $81.658 | $252.055 | $230.306 |
| Gross profit / margin | $23.522 / 27.9% | $21.840 / 26.7% | $69.130 / 27.4% | $61.088 / 26.5% |
| Operating income / margin | $4.284 / 5.1% | $4.961 / 6.1% | $13.009 / 5.2% | $12.828 / 5.6% |
| Net income / margin | $2.887 / 3.4% | $3.237 / 4.0% | $8.302 / 3.3% | $8.320 / 3.6% |
| Diluted earnings per share | $0.26 | $0.29 | $0.74 | $0.75 |
| Net cash from operations | — | — | $8.786 | $7.590 |
- Quarter revenue rose 3.3%, while net income fell 10.8%. Nine-month revenue rose 9.4%, while net income was nearly unchanged, down $0.018 million.
- Gross margin improved in both comparisons, which management attributed primarily to better workers’ compensation experience. Higher general and administrative costs more than offset that benefit in Q3: those expenses rose 14.4% year over year and increased to 21.4% of revenue from 19.3%.
- Nine-month operating expenses rose 16.3%, faster than revenue; operating margin declined to 5.2% from 5.6%. Management cited higher wages, payroll taxes, stock compensation, legal and consulting expenses, temporary staffing, and implementation of a new HR and payroll system.
- Nine-month investing cash outflow was $5.712 million, primarily including the $4.250 million PHHC acquisition and $1.316 million of property and equipment purchases. Financing cash outflow was $1.560 million, including a $1.000 million earn-out payment and $0.779 million of capital-lease payments.
- At September 30, cash was $14.877 million, accounts receivable net was $78.395 million, total assets were $195.056 million, and total liabilities were $57.331 million. Capital-lease obligations totaled $3.262 million; no revolving-credit borrowings were outstanding. The $55 million revolver had $41.504 million available after letters of credit and borrowing-base limits.
Material changes and operating developments
- Q3 revenue growth reflected a 1.2% increase in average billable census and a 1.9% increase in revenue per billable hour. For the first nine months, billable hours increased 8.3%, while average billable census grew 0.2% and revenue per billable hour rose 1.1%.
- The payor mix shifted toward managed care: it represented 18.1% of Q3 revenue and 18.2% of nine-month revenue, versus 9.5% and 6.8%, respectively, in 2014. Government programs remained the majority payor category.
- Illinois remains a major concentration: it generated 60.4% of Q3 revenue and 59.1% of nine-month revenue. The Illinois Department on Aging alone accounted for 50.0% and 48.6%, respectively.
- Receivables increased by $10.062 million from year-end, primarily because of delayed Illinois payments. Days sales outstanding rose to 86 from 80 at December 31, 2014; the Illinois Department on Aging DSO was 92 days versus 85. The company reported collecting a further $17.005 million from Illinois after quarter-end.
- PHHC, acquired January 1 for $4.250 million cash, contributed $2.500 million of Q3 and $7.160 million of nine-month revenue. In April, the company entered into an agreement to acquire South Shore Home Health Service and Acaring Home Care for approximately $18 million to expand into New York; the filing does not clearly state that this transaction had closed by September 30.
Outlook, risks, and contingencies
- No specific revenue or earnings guidance was provided. Management said cash from operations and available credit were expected to cover working-capital needs for at least the next 12 months.
- Management warned that further delays in Illinois payments could pressure liquidity and increase reliance on the revolver. Receivables depend heavily on government programs, and Medicaid rules, authorization, billing documentation, and state funding conditions can affect payment and estimates.
- The renewed $55 million credit facility expires November 2, 2019, is secured by company assets, and includes financial and other restrictive covenants. Acquisitions are subject to lender restrictions, including limits on deal count and purchase price without consent.
- A Department of Labor rule extending federal minimum-wage and overtime protections to most direct-care workers was reinstated in August 2015, with enforcement potentially beginning in November. The company said higher labor costs could adversely affect results. It also noted that about 22% of employees had no medical coverage, creating potential costs or penalties under health-coverage requirements.
- Other risks include wage and hour compliance, SEIU negotiations, and dependence on Illinois. A $1.203 million indemnification reserve remained for pre-sale Medicare and Medicaid billing adjustments after the company voluntarily remitted $1.840 million to the U.S. government in 2014. Management considered ordinary-course legal proceedings not material. No off-balance-sheet guarantees or arrangements were reported.
- No goodwill or intangible-asset impairment was recorded in the period; the annual goodwill impairment test was planned for Q4 2015. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Investor verification points
- Track Illinois receivable aging, subsequent collections, and DSO, including the concentration of revenue and receivables with the Illinois Department on Aging.
- Assess whether managed-care growth and acquisition contributions translate into sustainable organic growth and improved operating margins as administrative costs rise.
- Verify the status, closing conditions, funding, and expected contribution of the proposed New York acquisition.
- Monitor the cost and operational impact of the direct-care overtime rule, employee health-coverage requirements, and labor negotiations.
- Review credit-facility covenant headroom, borrowing availability, capital-lease obligations, and any changes in the contingent earn-out or billing-adjustment reserves.