Business Context and Reporting Period
Addus HomeCare Corporation (Addus) is a provider of home and community services and home health services across 19 states. This Form 10-Q covers the quarterly period ended September 30, 2010. The company operates through two reportable segments: Home & Community (non-medical personal care) and Home Health (skilled nursing and therapy). During the period, Addus completed the acquisition of Advantage Health Systems, Inc., expanding its footprint in South Carolina and Georgia.
Key Financial Metrics
| Metric | Three Months Ended Sep 30, 2010 | Nine Months Ended Sep 30, 2010 |
|---|---|---|
| Net Service Revenues | $69.8 million | $201.6 million |
| Net Income | $1.5 million | $4.5 million |
| Net Income Attributable to Common Shareholders | $1.5 million | $4.5 million |
| Diluted EPS | $0.14 | $0.43 |
| Operating Cash Flow (9 months) | $5.1 million | |
| Cash and Cash Equivalents | $0.6 million (as of Sep 30, 2010) | |
| Total Debt | $50.5 million (including $6.4 million current maturities) | |
| Available Credit Facility | $9.2 million |
Material Changes vs. Prior Period
- Revenue Growth: Net service revenues increased 4.5% ($3.0 million) for the quarter and 4.1% ($8.0 million) for the nine months compared to the prior year periods. Growth was driven by the Advantage acquisition and increased billable hours in the Home & Community segment.
- Profitability Decline: Despite revenue growth, Net Income decreased 29.2% for the quarter and 16.6% for the nine months. Operating income dropped 30.9% for the quarter and 20.2% for the nine months.
- Segment Performance:
- Home & Community: Revenues increased 6.4% (quarter) and 5.0% (nine months). Operating income improved slightly.
- Home Health: Revenues decreased 3.0% (quarter) and grew only 0.6% (nine months). Operating income fell significantly (48.3% for the quarter) due to lower non-Medicare census and Medicare admissions.
- Accounts Receivable: Net accounts receivable increased by $5.2 million to $75.7 million. Days Sales Outstanding (DSO) rose to 97 days, primarily due to delayed reimbursements from the State of Illinois and system conversion issues.
Outlook, Risks, and Management Commentary
- Liquidity Concerns: Management notes that delayed payments from the Illinois Department on Aging (the company's largest payor) have adversely impacted liquidity. The company relies on its credit facility, which has $9.2 million available, to cover working capital needs.
- Goodwill Impairment Risk: Management identified potential triggers for goodwill impairment, including recent earnings declines, economic conditions, and stockholders' equity exceeding market capitalization. An annual impairment test is scheduled for December 31, 2010, which could result in a non-cash charge.
- Regulatory Risks: The company faces risks from the Health Reform Act and CMS proposed rule changes, including a 3.79% reduction in home health payment rates for 2011 and stricter face-to-face encounter requirements for physicians.
- Legal Proceedings: A class action lawsuit was filed regarding the company's IPO, alleging material misstatements regarding accounts receivable reserves and revenue forecasts. A shareholder derivative action was also filed in November 2010. Management intends to defend these vigorously.
- Management Transition: The company is in transition, searching for a new Chief Financial Officer and a Chief Operating Officer following the resignation of the previous CFO.
Investor Verification Checklist
- Illinois Receivables: Verify the status of the $44.3 million receivable balance from the Illinois Department on Aging and the likelihood of collection given state budget delays.
- Goodwill Valuation: Monitor the December 2010 annual impairment test results, as a write-down could materially impact net worth and earnings.
- Credit Facility Covenants: Confirm continued compliance with leverage ratios and fixed charge coverage ratios, especially given the decline in operating income.
- Legal Exposure: Track the progress of the IPO-related class action lawsuit and potential indemnification claims from underwriters.
- Medicare Rate Changes: Assess the financial impact of the finalized 2011 Home Health PPS Update, specifically the 3.79% rate reduction.