Addus HomeCare Corporation — Q3 2012 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2012. Dollar amounts are in millions unless otherwise stated. The company provides home and community-based personal care and home health services through 117 locations in 19 states, serving more than 26,000 individuals.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Net service revenue | $71.0 | $69.4 | $209.2 | $204.5 |
| Gross profit | $20.3 | $21.0 | $59.4 | $60.2 |
| Gross margin | 28.6% | 30.3% | 28.4% | 29.4% |
| Operating income (loss) | $3.2 | $(12.9) | $7.3 | $(8.2) |
| Net income (loss) | $1.8 | $(6.7) | $3.9 | $(4.5) |
| Diluted earnings (loss) per share | $0.17 | $(0.62) | $0.36 | $(0.42) |
- Q3 revenue grew 2.3%; nine-month revenue also rose 2.3%. Home and community growth more than offset contraction in home health.
- For the nine months, operating cash flow was $9.3 million, down from $11.8 million. Investing used $0.5 million and financing used $9.1 million; cash fell $0.3 million to $1.7 million.
- At September 30, cash was $1.7 million, current assets $88.1 million, and current liabilities $41.6 million. Total debt was $22.4 million: $20.5 million revolving borrowings, $0.8 million term loan, and $1.1 million subordinated notes.
- Revolving credit availability was $15.8 million, subject to borrowing-base limitations; approximately $7.4 million of letters of credit were outstanding. The company reported compliance with credit covenants. The revolver matures in November 2014; the term loan matures in January 2013 and subordinated notes in December 2012.
Changes versus prior comparable periods
- Home and community revenue increased 6.1% in Q3 and 6.0% year to date, supported by higher average census and billable hours. Its Q3 operating income rose to $7.5 million from $6.8 million; nine-month operating income increased to $21.0 million from $18.1 million.
- Home health revenue declined 13.6% in Q3 and 13.1% year to date. Admissions fell, and revenue was lost from closed or sold agencies. The segment recorded a Q3 operating loss of $0.1 million and a nine-month loss of $1.3 million, versus losses of $15.8 million and $14.3 million, respectively, in 2011.
- The 2011 comparison includes a $16.0 million home health goodwill and intangible-asset impairment charge. Excluding that charge, the filing reports 2011 operating margins of 4.5% for Q3 and 3.8% year to date; 2012 margins were 4.5% and 3.5%, respectively.
- Workers’ compensation costs and average claim costs pressured segment gross margins. Home health nine-month gross margin fell to 43.8% from 46.2%; home and community Q3 gross margin fell to 25.3% from 26.3%.
- Debt repayments contributed to lower interest expense. The company recorded a $0.5 million gain on the February 2012 sale of a Portland home health agency.
Outlook, commentary, and risks
- On November 1, 2012, after quarter-end, the company announced it would explore strategic alternatives for its home health business and retained a financial adviser. No transaction or outcome is assured. The company also announced its COO’s resignation, effective November 16, 2012.
- Management stated that cash from operations and available credit were expected to cover working-capital needs for at least the next 12 months. This outlook is exposed to delayed state reimbursements: Illinois receivables rose $5.6 million to $53.0 million, and Illinois was the source of 48.7% of nine-month revenue. The Illinois Department on Aging’s DSO was 127 days.
- Revenue is highly concentrated in government programs. Medicare and one state agency accounted for 10.6% and 48.7% of nine-month revenue, respectively. The filing identifies reimbursement timing, state budgets, Medicare and Medicaid rule changes, and collection estimates as risks.
- CMS’s proposed 2013 home health update included a 1.5% payment update offset by a proposed 1.32% reduction for case-mix changes. The filing warns that Medicare payment reductions could harm revenue, profit, and liquidity. No company earnings or revenue guidance is provided.
- The company planned its annual goodwill impairment test for Q4 2012. Home and community goodwill fair value had exceeded carrying value by about $9.1 million, or 8.9%, at the October 2011 test date; actual results could differ from valuation assumptions.
- Management considered ordinary-course legal proceedings not likely to have a material effect. It reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Progress and potential terms or timing of the home health strategic review, and the impact of the COO transition.
- Subsequent collection of Illinois and other state receivables, cash conversion, and credit-facility availability and covenant headroom.
- Repayment or refinancing of the term loan and subordinated notes at their stated maturities.
- Whether home health admissions and margins stabilize, and the company’s response to Medicare rate and case-mix changes.
- Results of the Q4 2012 goodwill impairment test and changes in workers’ compensation claims and costs.