Addus HomeCare Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; comparative period is Q1 2015. Amounts below are in U.S. dollars. The financial statements are unaudited.
Business context
Addus provides home and community-based personal care and adult day services, primarily to people eligible for both Medicare and Medicaid. At quarter-end, it served over 32,000 consumers through 120 locations in 23 states. The company reported one business segment. Government programs remained its largest payer category, while managed care grew as a share of revenue.
Financial performance
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Net service revenue | $92.6 million | $81.9 million | +13.0% |
| Gross profit | $24.3 million | $21.9 million | +10.9% |
| Gross margin | 26.3% | 26.8% | -0.5 percentage points |
| Operating income | $0.7 million | $3.6 million | -82.0% |
| Net income | $0.2 million | $2.2 million | -92.7% |
| Diluted earnings per share | $0.01 | $0.19 | Lower |
| Net cash used in operating activities | $6.0 million | $0.9 million | Greater use of cash |
Revenue growth reflected the South Shore acquisition, higher average billable census (+1.9%), and slightly higher revenue per billable hour (+0.4%). Billable hours increased 12.6%. Gross margin declined, which management attributed primarily to acquired businesses with lower margins. General and administrative expense rose 29.4% to $22.2 million, increasing from 20.9% to 24.0% of revenue. The company cited $2.2 million of severance, $0.9 million of restructuring costs related to discontinued internally developed software, $0.6 million higher bad-debt expense, and $0.4 million of acquisition costs as contributors. Net interest expense increased to $0.4 million from $0.2 million, mainly due to credit-facility borrowings.
Cash, debt and liquidity
- Cash was $9.1 million at March 31, 2016, versus $4.1 million at December 31, 2015.
- Net accounts receivable was $105.8 million, up $20.8 million from year-end; gross receivables were $111.2 million and the allowance was $5.5 million. DSO increased to 104 days from 92 days.
- Operating cash use was driven mainly by a $16.1 million accounts-receivable cash outflow. Investing cash use was $20.8 million, including $20.4 million for acquisitions. Financing provided $31.7 million, primarily from $32.0 million of borrowings.
- Debt carrying value was $33.3 million, including $32.0 million drawn under the credit facility and $2.7 million of capital leases, net of $1.4 million in unamortized issuance costs. Credit-facility availability was reported at $42.8 million. The facility includes a $75 million revolver, a delayed-draw term facility, and an uncommitted incremental term facility.
- After quarter-end, on May 5, the company drew an additional $10.0 million on its revolver to fund ongoing operations.
Management stated that available borrowings together with operating cash flows were expected to cover working-capital needs for at least 12 months. However, it warned that continuing Illinois payment delays or a prolonged state budget impasse could impair liquidity and require additional borrowing or other financing.
Material developments, outlook and risks
- Illinois concentration and payment delays: The Illinois Department on Aging accounted for 44.8% of Q1 revenue and 57.3% of quarter-end receivables. Illinois governmental receivables rose to $64.3 million from $50.4 million at year-end; its DSO was 132 days, versus 101 days. The state had not adopted a fiscal 2016 budget, and management said payments to non-Medicaid consumers could not be made without a budget or court order. Those consumers represented approximately $60 million of annual company revenue.
- Acquisitions: The company completed its $20.4 million South Shore and Acaring acquisition on February 5, 2016; the acquired businesses contributed $8.2 million of Q1 revenue. It also acquired certain LSSI assets for approximately $0.1 million. South Shore purchase-price allocations were preliminary and expected to be finalized in Q2.
- Payer mix: Government programs represented 73.2% of revenue, down from 77.7%; managed care represented 23.1%, up from 18.3%. Management linked the managed-care increase principally to South Shore.
- Legal matters: A qui tam lawsuit alleges False Claims Act and anti-kickback violations relating to historical referrals; the government had declined to intervene at the time of the filing. The company said it intended to defend the case and did not expect a material adverse effect. Separately, Addus joined other Illinois providers in a May 4 action seeking relief over unpaid state contracts and the state budget impasse.
- Controls: Management reported disclosure controls were not effective due to a previously identified material weakness involving segregation of duties, user access, monitoring of billing transactions, data validation, and review of hiring, termination, and payroll changes. Remediation efforts were underway; management said additional procedures supported the reported financial statements.
- Other events: CFO Donald Klink left effective May 5; Brian W. Poff was named to succeed him effective May 10. The filing provided no formal earnings or revenue guidance.
Most important facts for investors to verify
- Whether Illinois budget and payment developments reduce receivable aging, DSO, and borrowing needs; monitor the large state and Illinois Department on Aging exposures.
- Whether the company can sustain liquidity after the additional May revolver draw, while meeting facility covenants and funding operations.
- Whether acquisition integration and acquired-business margins improve enough to offset higher operating costs and amortization.
- Progress and testing of remediation for the disclosed material weakness, particularly billing, payroll, access, and monitoring controls.
- The outcome and potential exposure of the False Claims Act litigation and Illinois provider lawsuit.
- The market-risk section says there was no outstanding variable-rate indebtedness, while the filing also reports $32.0 million drawn on a credit facility whose interest rates are described as variable. Clarify this apparent inconsistency.