Addus HomeCare Corporation — Form 10-Q Summary
Period clarification: The supplied filing is for the quarter ended June 30, 2020, not 2019 Q2 as stated in the request metadata. It was signed August 10, 2020. Financial amounts below are in U.S. dollars; “m” means millions.
Business context and reporting period
Addus provides personal care, hospice and home health services across multiple states, primarily to people eligible for Medicare and Medicaid. As of June 30, 2020, it operated in 25 states through 190 offices and served approximately 55,000 individuals during the first half of 2020. The filing compares Q2 and first-half 2020 with the corresponding 2019 periods; 2019 figures were revised for previously identified errors.
Financial performance and liquidity
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net service revenue | $184.6m | $148.9m | $374.8m | $287.4m |
| Gross profit / margin | $55.0m / 29.8% | $39.7m / 26.7% | $110.8m / 29.6% | $76.5m / 26.6% |
| Operating income | $9.6m | $7.4m | $20.3m | $12.9m |
| Net income | $6.9m | $5.3m | $15.6m | $9.6m |
| Diluted EPS | $0.43 | $0.39 | $0.98 | $0.71 |
- Q2 revenue rose 23.9% and first-half revenue rose 30.4%. Management attributed growth to same-store performance, higher revenue per billable hour and acquisitions, partly offset by lower personal-care average billable census.
- First-half operating cash flow was $50.9m, versus cash used of $4.1m in the prior-year period. The filing cites lower receivables, including improved collections in New York, as key drivers. Investing activities used $5.0m; financing activities provided $0.9m.
- Cash was $158.5m at June 30, versus $111.7m at year-end 2019. Debt outstanding under the credit facility was approximately $62.1m before unamortized issuance costs; available borrowing capacity was $223.5m. The company reported a zero total net leverage ratio and compliance with financial covenants.
- First-half effective tax rate was 18.6%, compared with 19.4% in 2019. The filing says excess tax benefits and federal employment tax credits contributed to the lower rate.
Material changes versus the prior comparable period
- Personal care revenue increased 13.7% in Q2 and 19.4% in the first half. Same-store growth was 9.7% and 11.8%, respectively; revenue per billable hour rose 11.8% and 11.9%. Average billable census declined 7.2% in Q2 and 3.1% in the first half.
- Hospice revenue increased to $24.5m in Q2 from $8.4m and to $49.7m in the first half from $16.4m, largely reflecting the 2019 Hospice Partners and Alliance acquisitions. Segment operating income increased to $7.3m in Q2 and $13.7m in the first half.
- Home health revenue rose, but segment operating income fell to $0.1m in Q2 from $0.3m; first-half operating income was $0.3m versus $0.4m. Management cited higher direct employee costs as a factor in lower gross margins.
- General and administrative expense grew faster than revenue: 42.6% in Q2 and 43.6% in the first half, with management citing acquisition-related staffing and costs, professional fees and higher audit expenses.
- The 2019 comparative financial statements were revised for errors in estimating implicit price concessions and other immaterial items. The correction reduced 2019 Q2 net income by $0.2m and first-half net income by $0.8m; cumulative retained earnings were reduced by $7.8m as of June 30, 2019.
Outlook, risks, contingencies and unusual items
- No formal earnings guidance is provided. Management said the COVID-19 pandemic’s longer-term effects were difficult to predict. It reported $2.0m of COVID-related costs in Q2 and $2.3m in the first half, mostly offset by temporary personal-care rate increases. It also recorded $1.6m of COVID-related payor payments as deferred revenue pending related expenses.
- Management warned that pandemic-related economic pressure could strain state budgets and affect Medicaid funding, reimbursement rates and collections. Illinois, New York and New Mexico had revised revenue estimates downward. Illinois represented 37.5% of first-half 2020 company revenue, and the Illinois Department on Aging represented 23.2%.
- The company received $6.9m of automatic federal provider relief funds in April and returned them in June. It deferred $7.1m of employer payroll taxes under the CARES Act, payable in installments in 2021 and 2022.
- In July 2020, Addus acquired A Plus Health Care for approximately $12.2m in cash. The filing states that purchase-price allocation was still being assessed.
- Addus disclosed that its disclosure controls and procedures were not effective as of June 30, 2020 because of material weaknesses previously reported in its 2019 Form 10-K. It also obtained lender consent extending the deadline for delivery of 2019 audited financial statements to October 31, 2020 after it could not file its 10-K on time.
- Other risks include dependence on government and managed-care reimbursement, concentrated exposure to Illinois and a major Illinois payor, caregiver recruitment and retention, changing Medicare and Medicaid rules, variable-rate debt and acquisition integration. Management said pending legal or administrative proceedings were not expected to have a material effect.
Important facts for investors to verify
- Confirm the correct reporting period: this filing covers Q2 2020, despite the request metadata indicating 2019 Q2.
- Review the 2019 financial-statement revisions, including the receivables allowance methodology and the cumulative retained-earnings adjustment.
- Track cash conversion and receivables, especially Illinois Department on Aging balances, payment timing and state budget or reimbursement changes.
- Assess whether higher revenue and margins can be sustained while G&A costs rise and personal-care census remains lower.
- Monitor COVID-related expenses and deferred reimbursements, state funding impacts, and the company’s compliance with lender covenants and its remediation of disclosed control weaknesses.
- Review the A Plus acquisition’s completed valuation and subsequent operating contribution when disclosed.