Addus HomeCare Corporation — Form 10-Q Summary
Business context and reporting period
Quarter and six months ended June 30, 2014. Addus provides home and community-based services, primarily under government programs, to more than 30,000 consumers through 133 locations in 22 states. The former home health business is reported as discontinued operations; continuing operations comprise one operating segment.
Financial performance and liquidity
| Metric | Three months ended June 30, 2014 | Six months ended June 30, 2014 |
|---|---|---|
| Net service revenue, continuing operations | $77.0 million; +17.0% year over year | $148.6 million; +15.5% |
| Gross profit / margin | $20.6 million / 26.7% (25.3% prior year) | $39.2 million / 26.4% (25.2% prior year) |
| Operating income / margin | $4.1 million / 5.3% (6.1% prior year) | $7.9 million / 5.3% (6.0% prior year) |
| Net income from continuing operations | $2.7 million, versus $2.6 million | $5.1 million, versus $5.3 million |
| Net income, including discontinued operations | $2.7 million, versus $2.4 million | $5.1 million, versus $15.7 million |
| Diluted EPS | $0.25 total | $0.46 continuing operations; $0.46 total |
For the six months, operating cash flow was $15.0 million, down from $34.2 million, primarily reflecting less favorable working-capital movements. Investing used $11.2 million, including $7.2 million for the Aid & Assist acquisition and $4.0 million of property and equipment purchases. Cash increased $4.0 million to $19.5 million.
At June 30, cash was $19.5 million, net accounts receivable $48.7 million, current liabilities $42.2 million, and stockholders’ equity $119.5 million. The company had no long-term debt or revolver borrowings and reported $40.0 million of revolver availability in the notes. It was in compliance with credit-facility covenants.
Material changes versus comparable periods
- Revenue growth reflected a 16.6% increase in second-quarter average billable census, including 8.7% same-store growth and 7.9% from acquisitions. Six-month census increased 13.2%, split between 6.3% same-store growth and 6.9% acquisitions.
- Gross margin improved, which management attributed mainly to lower-than-anticipated workers’ compensation expense and higher-margin acquisitions. G&A rose to 20.0% of revenue from 18.4% in the quarter and 18.3% in the six-month period, reflecting acquisition-related costs, professional fees, personnel, headquarters move costs and IT spending.
- Six-month total net income fell from $15.7 million to $5.1 million largely because the 2013 period included an $11.1 million after-tax gain on the home health business sale. Continuing-operations income was modestly lower.
- Receivables declined: net accounts receivable was $48.7 million versus $61.4 million at year-end. The Illinois state receivable declined from $44.4 million to $32.3 million; continuing-operations DSO improved from 85 to 62 days.
Outlook, risks, contingencies and unusual items
- Management said cash and available credit, together with operating cash flow, should meet working-capital needs for at least 12 months. No numerical earnings or revenue guidance was provided.
- Payor concentration remains significant: the Illinois Department on Aging generated 54.2% of quarterly and 54.6% of six-month continuing revenue; Illinois receivables were 54% of total receivables at June 30. Management noted that state payments have been sporadic and delayed historically, although collections accelerated in the latest quarter. Further delays could pressure liquidity.
- The company voluntarily remitted $1.84 million to the government in March 2014 after finding documentation errors in Medicare claims. It estimated a further $1.596 million of related billing adjustments remaining at June 30. Ordinary-course legal and administrative matters were not expected by management to materially affect financial condition or results.
- The June acquisition of Aid & Assist expanded the company in Tennessee. Consideration was $8.253 million, including $1.020 million estimated contingent consideration; acquisition costs of $536,000 were expensed. Purchase-price allocations were preliminary.
- On August 11, 2014, after quarter-end, Addus replaced its expiring $55 million revolver with a five-year facility maturing November 2, 2019. It generally retained prior terms, with higher permitted capital spending and acquisition thresholds and a larger letter-of-credit sublimit.
- Management concluded disclosure controls were not effective at June 30 because previously identified material weaknesses remained in IT access, segregation-of-duties and change-management controls, and payroll processes. The company described remediation work and additional post-closing procedures.
- The filing reports revolver availability of $40.004 million in the financial-statement note but also cites $42.579 million in the MD&A; the filing text does not provide a clear reconciliation.
Important facts for investors to verify
- Progress in remediating the IT and payroll control weaknesses, and whether they affect subsequent reporting.
- Final exposure and resolution of the Medicare billing adjustments beyond the $1.596 million reserve.
- Illinois payment timing, receivable collections and continued dependence on the Illinois Department on Aging.
- The correct revolver availability at June 30 and the terms, covenant headroom and utilization of the renewed facility.
- Final Aid & Assist purchase-price allocation and earn-out outcomes, alongside acquisition integration costs and margin performance.