Addus HomeCare Corporation — FY 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual filing, not a standalone quarterly report; selected Q4 results are included below. The filing was signed August 10, 2020.
Business context and reporting period
Addus provides in-home personal care, hospice and home health services, principally to older adults and other individuals needing assistance. Services are funded mainly by government programs and managed care organizations. At year-end, the company operated in 26 states through approximately 198 offices and served about 61,000 individuals.
2019 included acquisitions of VIP, Alliance, Foremost and Hospice Partners. Hospice Partners expanded hospice operations into six states; acquisitions completed in 2019 contributed $55.8 million of annual revenue. The company also completed a 2.3 million-share public offering in September, receiving approximately $172.9 million net.
Financial performance and liquidity
| Metric | FY 2019 | FY 2018 | Change / context |
|---|---|---|---|
| Net service revenue | $648.8 million | $516.6 million | Up 25.6% |
| Gross profit / margin | $179.2 million / 27.6% | $136.8 million / 26.5% | Margin improved |
| Operating income / margin | $34.8 million / 5.4% | $22.8 million / 4.4% | Up 52.2% |
| Continuing-operations net income | $25.8 million | $16.3 million | Up 58.3% |
| Net income | $25.2 million | $16.4 million | Includes discontinued-operations loss of $0.6 million |
| Diluted EPS | $1.77 | $1.33 | Continuing-operations diluted EPS: $1.81 |
| Adjusted EBITDA | $58.7 million | $42.5 million | Up 38.2%; non-GAAP measure |
| Operating cash flow | $12.0 million | $33.2 million | Down, primarily reflecting receivables growth and higher DSO |
Q4 selected results: Revenue was $192.4 million versus $139.3 million in Q4 2018; operating income was $14.5 million versus $6.4 million; net income was $10.7 million versus $4.4 million. Q4 gross margin was approximately 29.9%, compared with 26.9% a year earlier.
Balance sheet and liquidity: Cash was $111.7 million and net accounts receivable was $149.7 million at December 31, 2019. Debt principal outstanding was approximately $62.3 million ($59.9 million carrying value net of issuance costs), compared with $20.0 million principal at year-end 2018. The company reported $191.4 million available under its credit facility and compliance with its financial covenants at year-end. Total assets were $636.7 million; stockholders’ equity was $475.6 million.
Operating cash flow was pressured by a $37.5 million increase in accounts receivable, net of acquisitions. DSO rose to 72 days from 65; Illinois Department on Aging DSO rose to 78 from 51 days. Receivables from that department increased to $37.6 million. The company recognized a $6.8 million Illinois rate-related bonus in FY 2019 and collected it in May 2020.
Material changes versus the prior comparable period
- Revenue growth reflected higher personal-care billable hours and rates, acquisitions, and expanded hospice and home health activity. Personal care revenue rose 18.3%; hospice revenue rose to $53.6 million from $18.9 million; home health revenue rose to $14.5 million from $6.9 million.
- Personal-care billable hours increased 10.4%, revenue per billable hour increased 7.0%, and same-store revenue growth was 8.2%, versus 2.8% in 2018.
- Consolidated gross margin improved by 1.1 percentage points. General and administrative expense increased 27.2% to $133.6 million, slightly faster than revenue, and rose to 20.6% of revenue from 20.3%.
- Cash from operations declined despite higher earnings, chiefly due to working-capital demands and slower collections. Debt increased to fund acquisitions, while the public offering funded most of Hospice Partners.
- Managed-care organizations increased to 37.8% of total revenue from 33.9%; within personal care, their share rose to 41.3% from 35.3%.
Outlook, commentary, risks and unusual items
- Outlook: The filing gives no quantified company revenue or earnings guidance. Management described growth opportunities from an aging population, managed-care expansion, Medicare Advantage supplemental benefits, organic growth and acquisitions.
- Geographic and payor concentration: Illinois represented 38.2% of total revenue; New York 16.7% and New Mexico 19.9%. The Illinois Department on Aging alone accounted for 25.3% of revenue. State budget pressure, reimbursement changes and payment delays could materially affect results and liquidity.
- Labor and reimbursement: Wages are a major cost; approximately 52.3% of employees were union-represented. Illinois minimum-wage increases were partly addressed by rate increases, but future offsets were not assured. Medicaid/Medicare policy, managed-care contracting, eligibility and utilization changes also pose risks.
- Debt and rates: Borrowings are variable-rate and the credit agreement includes leverage, interest-coverage and other restrictive covenants. Management cited uncertainty around LIBOR’s potential discontinuation. A 100-basis-point rate increase was estimated to reduce 2019 net income by about $0.3 million.
- Acquisition and accounting items: Goodwill was $275.4 million and intangible assets $57.1 million, with no impairment recorded. The company revised previously issued statements for immaterial errors in estimates of implicit price concessions and certain tax items. It reported material weaknesses involving risk assessment, review of hours worked and billed, and estimation of receivable collectability; disclosure controls were deemed ineffective. The annual filing was late, and lenders extended the audited-financial-statement delivery deadline to October 31, 2020.
- Legal and unusual items: A False Claims Act-related matter concerning the sold legacy home-health business was settled and dismissed in 2019; a $0.6 million expense was recorded in discontinued operations. Management stated pending legal proceedings were not expected to materially affect financial position or results.
- COVID-19 subsequent developments: The filing said the pandemic’s ultimate impact was uncertain and could affect state budgets, staffing, expenses and collections. For the first half of 2020, reported COVID-related costs were approximately $2.3 million, mostly offset by $1.7 million of temporary rate increases. The company received $6.9 million in automatic provider-relief grants and returned the funds in June 2020.
Key facts investors should verify
- Whether receivables, DSO and cash conversion improved after year-end, particularly collections from Illinois and its Department on Aging.
- Progress in remediating the material weaknesses and whether future filings report effective controls and reliable revenue/receivable estimates.
- Acquisition performance, integration, purchase-price valuations and the sustainability of growth excluding acquisitions.
- Exposure to Illinois, New York and New Mexico budgets, reimbursement rates, minimum-wage costs and managed-care contract changes.
- Current covenant headroom, debt balances, variable-rate exposure and the company’s transition plan for LIBOR-related borrowings.