Addus HomeCare Corporation (ADUS) — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; filed May 9, 2019. Figures are unaudited and in U.S. dollars unless otherwise noted. Addus provides personal care, hospice and home health services. It operated in 24 states through 157 offices and served approximately 43,000 individuals during the quarter.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Net service revenue | $139.3 million | $109.5 million |
| Gross profit / margin | $37.6 million / 27.0% | $27.9 million / 25.5% |
| Operating income / margin | $6.2 million / 4.5% | $4.6 million / 4.2% |
| Income before taxes | $5.8 million | $6.0 million |
| Net income / diluted EPS | $4.9 million / $0.36 | $4.9 million / $0.42 |
| Operating cash flow | $(3.2) million | $14.3 million |
- Revenue increased 27.2%, reflecting 13.8% more personal care billable hours, a 3.3% increase in personal care revenue per billable hour, and revenue from hospice and home health operations acquired in 2018.
- Gross margin improved, while G&A rose to $29.3 million from $21.5 million and increased as a share of revenue to 21.0% from 19.7%. Management attributed higher costs primarily to acquired businesses and related staffing, rent and professional fees.
- Net income was nearly unchanged despite revenue growth. Q1 2018 included $2.3 million of Illinois prompt-payment interest income, compared with $0.1 million in Q1 2019; this drove the year-over-year reduction in net interest income.
- Cash was $66.2 million at March 31, down from $70.4 million at year-end. Cash used in investing was $1.0 million, primarily property and equipment purchases; financing activities used $0.03 million.
- Net accounts receivable rose $12.1 million to $120.1 million. Days sales outstanding increased to 78 from 71 at year-end; Illinois Department on Aging DSO rose to 67 from 55 days. Management cited Illinois collections and delayed billing tied to January 2019 rate changes in New York and New Mexico as factors behind weaker operating cash flow.
- The company had $20.0 million of revolving borrowings at a 4.49% interest rate and $141.2 million of availability. Long-term debt, net of issuance costs and current maturities, was $17.4 million. The credit facility matures in May 2023; the company reported compliance with its covenants.
- Adoption of lease accounting in January 2019 added $16.7 million of operating lease assets and $16.8 million of lease liabilities. Management said adoption did not significantly affect results or liquidity.
Material changes, outlook and risks
- Hospice and home health, both acquired with Ambercare in 2018, contributed $7.9 million and $2.7 million of Q1 revenue, respectively; neither segment had comparable Q1 2018 revenue. Personal care revenue grew 17.5%.
- There is no specific earnings or revenue guidance in the filing. Management described Medicare Advantage coverage of broader supplemental benefits, including non-skilled in-home care, as a potential demand opportunity over the next three to five years.
- Illinois remains a significant concentration: the Illinois Department on Aging represented 28.9% of company revenue in Q1 2019, and Illinois generated 44.8% of personal care revenue. Delayed state payments or budget disputes could further pressure collections and liquidity.
- Wage increases, particularly in Chicago, may pressure margins when reimbursement rates do not keep pace. Management anticipated possible reimbursement relief in the first half of 2019; the filing does not establish that it was enacted.
- Management reported a material weakness in internal controls related to the electronic visit verification vendor’s controls and insufficiently precise compensating review controls. Disclosure controls were deemed ineffective as of March 31, 2019. Remediation was underway, with completion expected before year-end, subject to effective operation and testing of controls and a vendor SOC 1 Type 2 report or alternative evidence.
- A pending Illinois False Claims Act/Federal False Claims Act case concerns alleged referral and anti-kickback violations involving services at three senior living facilities. The company intends to defend the case and believes it will not have a material adverse effect; the U.S. government and Illinois declined to intervene.
- Restructuring and severance costs were $0.4 million in the quarter; management expected some additional costs but could not determine amount or timing. No hospice Medicare cap liability or goodwill or intangible impairment was recorded.
Important facts for investors to verify
- Whether Illinois, New York and New Mexico receivables convert to cash, and whether DSO and operating cash flow improve.
- Whether reimbursement increases offset rising labor costs, particularly in Chicago, and how changes in government and managed-care payment rates affect margins.
- Whether growth from acquisitions translates into sustained earnings and cash generation, given nearly flat reported net income and lower diluted EPS.
- Progress in remediating the EVV-related material weakness, including vendor reporting and effectiveness testing.
- Developments in the pending False Claims Act litigation and any material change in exposure.
- Credit-facility covenant compliance, borrowing availability and the effect of variable interest rates; the filing estimates a 100-basis-point rate increase would reduce quarterly net income by $39,500.