Addus HomeCare Corporation — Q1 2018 Form 10-Q
Business context and reporting period
Quarter ended March 31, 2018; comparisons are with Q1 2017. Addus provides in-home personal care services, operating in 23 states through 115 offices and serving more than 34,000 consumers. The company reports one business segment.
Financial and operating results
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Net service revenue | $109.4 million | $101.6 million | +7.7% |
| Gross profit / margin | $27.9 million / 25.5% | $27.3 million / 26.9% | Margin down 1.4 points |
| Operating income / margin | $4.6 million / 4.2% | $7.0 million / 6.9% | Operating income down 34.5% |
| Net income / diluted EPS | $4.9 million / $0.42 | $4.3 million / $0.37 | Net income up 14.1% |
| Cash from operations | $14.3 million | $9.6 million | Up $4.7 million |
Revenue growth reflected 4.0% more billable hours and a 3.6% increase in revenue per billable hour. Average billable census rose 0.7%. Cost of service revenue increased 9.8%, faster than revenue, contributing to lower gross margin. General and administrative expense rose 13.7% to $21.5 million, primarily from higher administrative compensation and acquisition costs.
Net income increased despite lower operating income, supported by $2.3 million of Illinois prompt-payment interest income and a lower effective tax rate (18.7%, versus 33.2%). Operating income in Q1 2017 included a $2.1 million gain on the sale of adult day services assets. Adoption of ASC 606 moved most amounts previously recorded as doubtful-account expense into revenue as implicit price concessions; the company said the $2.0 million presentation change reduced reported revenue and gross profit but did not affect operating or net income. Q1 2017 comparative revenue likewise reflects the former presentation.
Operating cash flow was $14.3 million, principally aided by collections of Illinois receivables. Investing cash use was $3.7 million, including $3.3 million for the LifeStyle acquisition; financing cash use was $0.9 million. Cash increased to $63.4 million from $53.8 million at year-end. Net accounts receivable was $83.8 million; DSO was 69 days, down from 73 at December 31, 2017.
Total debt, including capital leases and net of issuance costs, was $42.2 million, including $43.9 million of term-loan principal before issuance costs and capital leases. The term loan carried a 4.16% rate. Revolver availability was $111.3 million; the company reported compliance with all credit covenants. Current assets were $154.4 million and current liabilities $51.4 million.
Material changes, outlook, and risks
- Government programs represented 61.5% of revenue and managed care 34.6%. The Illinois Department on Aging alone accounted for 36.6%; Illinois operations made up 52.4% of revenue. New Mexico revenue share increased to 10.8% from 6.8%.
- The company completed the $4.1 million LifeStyle acquisition on January 1, 2018. After quarter-end, it completed the Ambercare acquisition on May 1 for approximately $40 million net of excess cash and acquired Arcadia assets on April 1 for approximately $18.5 million. Both were funded through the delayed-draw term loan. No formal earnings guidance is provided in the filing.
- Illinois reimbursement timing and future state budgets remain uncertain and may affect collections, liquidity, and borrowing needs. The company received delayed payments beginning in July 2017; additional prompt-payment interest may be due, but its amount and timing are uncertain.
- Q1 included $0.5 million of restructuring costs; management expects some additional costs but cannot estimate their timing or amount. Workers’ compensation accruals were $13.6 million.
- A False Claims Act lawsuit was narrowed by the court in March 2018 to allegations concerning home health services at three Illinois senior living facilities. Management intends to defend the case and believes it will not materially affect results. The company also faces labor negotiations and variable-rate debt exposure; a 100-basis-point rate increase was estimated to reduce quarterly net income by $89,000.
- Management expected the new lease accounting standard to materially affect the balance sheet, but not liquidity. Management reported disclosure controls were effective and no material change in internal control during the quarter.
Key facts for investors to verify
- Whether revenue and margin trends persist after considering ASC 606 presentation effects, acquisition contributions, and the prior-year asset-sale gain.
- Collection trends and Illinois budget/reimbursement developments, including any further prompt-payment interest receipts.
- Integration and performance of LifeStyle, Ambercare, and Arcadia, together with acquisition-related borrowing and covenant capacity.
- Future labor, workers’ compensation, restructuring, and litigation costs, and the sensitivity of earnings to variable interest rates.