Addus HomeCare Corporation — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014. The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures below are from its unaudited quarterly table. Amounts are in millions of dollars unless stated otherwise.
Business context and period
Addus provides primarily non-medical home and community-based care, including personal care and adult day services, focused on elderly, chronically ill and disabled consumers. At year-end it operated 129 locations in 22 states and five adult day centers in Illinois, serving an average billable census of 31,019 during 2014. The company continued shifting its payer mix toward managed care and pursuing acquisitions after selling most of its home health business in 2013.
Financial and operating highlights
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Net service revenue, continuing operations | $312.942 | $265.941 |
| Gross profit / gross margin | $83.735 / 26.8% | $67.739 / 25.5% |
| Operating income / operating margin | $18.071 / 5.8% | $15.461 / 5.8% |
| Net income from continuing operations | $11.963 | $11.163 |
| Net income, including discontinued operations | $12.243 | $19.145 |
| Adjusted EBITDA, a non-GAAP measure | $23.759 | $18.796 |
| Cash from operating activities | $7.028 | $27.393 |
- Revenue increased 17.7%; average billable census rose 15.7% and billable hours rose 17.4%. Revenue per billable hour was $17.07 versus $17.02.
- Management attributed census growth to same-store growth (45.6% of the increase) and acquisitions (54.4%). Gross margin improved, primarily on lower-than-anticipated workers’ compensation expense and higher-margin acquisitions; G&A rose to $61.834 million, or 19.8% of revenue, from 18.8%.
- Annual net income fell 36.1%, largely because 2013 included an $8.962 million after-tax gain on the home health business sale. Continuing-operations net income increased 7.2% year over year.
- For the fourth quarter of 2014, revenue was $82.636 million, operating income $5.242 million, continuing-operations net income $3.643 million and total net income $3.923 million. Fourth-quarter 2013 comparatives were $69.882 million, $3.476 million, $3.124 million and $0.885 million, respectively.
Balance sheet, liquidity and debt
- At December 31, 2014, cash was $13.363 million, net accounts receivable $68.333 million, total assets $180.803 million and stockholders’ equity $127.956 million.
- No borrowings were outstanding under the revolving credit facility. The company reported $39.536 million available under its $55 million revolver, subject to borrowing-base and covenant terms; outstanding letters of credit were $15.464 million.
- Balance-sheet debt of $3.663 million consisted of capital lease obligations; the company also reported $2.120 million in contingent earn-out obligations. Operating and capital lease commitments totaled $20.828 million.
- Cash from operations declined to $7.028 million, primarily because of lower collections on receivables. Investing activities used $13.633 million, including $7.172 million for acquisitions and $6.411 million for property and equipment. Year-end cash decreased by $2.202 million.
- Management stated that cash from operations and available credit were expected to cover working-capital needs for at least the next 12 months.
Material changes, outlook and risks
- Managed care organizations accounted for 9.1% of continuing-operations revenue, up from 1.0% in 2013; state, local and other government programs still provided 86.4%.
- Illinois remained a major concentration: the state represented 60.6% of revenue, and the Illinois Department on Aging alone represented 53.2%. Illinois receivables were $44.136 million at year-end, 54.2% of total receivables; payment delays remain a liquidity risk.
- The June 2014 Aid & Assist acquisition contributed $7.536 million of 2014 revenue. On January 1, 2015, Addus acquired Priority Home Health Care for approximately $4.25 million. Management anticipated acquisitions to be accretive to 2015 earnings; the filing gives no specific 2015 revenue or earnings guidance.
- In March 2014, Addus voluntarily repaid approximately $1.840 million to the government after finding documentation errors in Medicare claims related to the former home health business. A $1.263 million reserve remained for estimated billing adjustments. The company also retained indemnification exposure for certain pre-sale claims, audits and legal or regulatory matters.
- Key risks include government budget and reimbursement changes, delayed payments, transition disruptions as states move programs to managed care, self-directed care alternatives, dependence on major payors and Illinois, labor costs and union negotiations, regulatory compliance and audits, and acquisition integration. Approximately 61.3% of employees were union-represented.
- The credit facility imposes financial and operating covenants and limits acquisitions without lender consent. Management reported that disclosure controls and internal control over financial reporting were effective; the acquired Aid & Assist business was excluded from management’s internal-control assessment.
Important facts for investors to verify
- Whether Illinois payment timing, state budget proposals and authorized service hours materially affect receivables, cash flow and margins.
- Whether managed-care growth and the Priority acquisition deliver the expected referrals, integration and earnings contribution.
- The adequacy of the $1.263 million billing-adjustment reserve and the ultimate extent of pre-sale indemnification or audit liabilities.
- Whether operating cash generation improves as the business grows, given the sharp 2014 decline and significant receivable balances.
- Credit-facility availability, covenant compliance, lease and earn-out obligations, and the impact of any future acquisitions on liquidity.