Addus HomeCare Corporation — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Unless otherwise noted, amounts below are in millions of dollars. Addus provides home- and community-based personal care and adult day services, primarily to people eligible for both Medicare and Medicaid. It served more than 34,000 consumers through 121 locations in 24 states.
Financial performance
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Net service revenue | $100.9 | $85.8 | $193.5 | $167.7 |
| Gross profit | $25.7 | $23.7 | $50.0 | $45.6 |
| Gross margin | 25.5% | 27.6% | 25.8% | 27.2% |
| Operating income | $4.4 | $5.1 | $5.0 | $8.7 |
| Operating margin | 4.4% | 5.9% | 2.6% | 5.2% |
| Net income | $2.6 | $3.3 | $2.8 | $5.4 |
| Diluted EPS | $0.23 | $0.29 | $0.25 | $0.48 |
Revenue rose 17.6% in Q2 and 15.4% in the first half, principally from the South Shore acquisition and higher billable hours. Net income fell 20.1% in Q2 and 49.1% year to date. The company attributed margin pressure largely to South Shore’s lower margins, higher service costs, acquisition-related amortization, severance and restructuring charges, and increased bad-debt expense. Q2 average billable census increased 2.9%; billable hours rose 16.3%. First-half census increased 2.1% and billable hours rose 14.5%.
Cash flow, balance sheet and debt
- Cash was $8.2 million at June 30, 2016, versus $4.1 million at year-end 2015. Net accounts receivable was $121.1 million, up from $85.0 million.
- First-half operating cash flow was negative $18.3 million, versus positive $35.0 million a year earlier. The principal driver was a $33.2 million cash use from accounts receivable growth, associated in part with delayed Illinois payments.
- Investing cash outflow was $21.2 million, including $20.4 million for South Shore. Financing provided $43.6 million, mainly from credit-facility borrowings. Ending cash increased by $4.1 million.
- Total debt, including capital leases and net of issuance costs, was $42.5 million, compared with $3.0 million at December 31, 2015. Credit-facility borrowings were $41.7 million; reported revolving availability was $46.4 million. The amended facility matures in November 2020 and is secured by substantially all company assets, with financial and other covenants.
- Current assets were $142.5 million and current liabilities $47.6 million. The filing reports no dividends.
Material developments, outlook and risks
- Acquisitions: Addus completed the $20.4 million South Shore and Acaring acquisition in February 2016. It contributed $13.5 million of Q2 revenue and $21.7 million for the first half. Purchase-price allocation remained preliminary. The company also acquired certain LSSI assets for approximately $0.1 million.
- Illinois reimbursement and concentration: Illinois Department on Aging generated 43.5% of Q2 revenue and 44.1% of first-half revenue. Illinois governmental receivables were $81.2 million at June 30; company-wide DSO was 109 days, and DSO for the Department on Aging was 158 days. Addus received $16.2 million from Illinois in August under a short-term budget, but future and past-due reimbursements remained uncertain. Management warned that further delays could pressure liquidity and require additional borrowing.
- Liquidity outlook: Management stated that cash and available credit, together with operating cash flow, should cover working-capital needs for at least 12 months. This depends in part on collections and credit-facility availability. The filing provides no formal earnings or revenue guidance.
- Exceptional costs: First-half results included $2.8 million of severance expense and $0.9 million of restructuring costs, including discontinued internally developed software and vendor-contract termination costs. The company also reported a $1.2 million year-over-year increase in bad-debt expense.
- Legal and regulatory matters: A qui tam lawsuit alleges False Claims Act and anti-kickback violations related primarily to referrals involving the home health business sold in 2013; the company is defending the case and the government declined to intervene at that time. Addus also joined an Illinois provider lawsuit seeking payment of overdue state bills. Management said ordinary-course proceedings were not expected to materially affect results.
- Operating risks: The company disclosed dependence on government reimbursement and a single major Illinois payor, labor-cost exposure from minimum-wage and overtime rules, and potential effects from state budget constraints. It noted the federal direct-care overtime rule remained in effect.
- Controls: Management concluded disclosure controls were not effective because of a previously identified material weakness involving segregation of duties, user access, transaction monitoring, underlying data validation, and payroll changes. Remediation was ongoing; management reported additional post-closing procedures and believed the financial statements fairly presented results.
Key facts for investors to verify
- Subsequent Illinois collections, the aging and collectability of receivables, and whether the state’s short-term budget funded the services and past-due claims described.
- Actual borrowing availability and covenant headroom under the amended facility, given negative operating cash flow and increased debt.
- Progress in remediating the material weakness and whether billing, payroll, and data-validation controls are operating effectively.
- Final South Shore purchase-price allocation and the acquired business’s contribution to margins and earnings.
- The status and potential exposure of the False Claims Act litigation and the Illinois provider action.
- The filing’s market-risk disclosure says there was no variable-rate indebtedness, while its credit-facility terms describe interest rates based on prime or LIBOR. Clarification of this apparent inconsistency is warranted.