Addus HomeCare Corporation: Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Financial statements are unaudited; amounts below are in millions unless stated otherwise.
Business context
Addus provides personal care and other home- and community-based services, primarily to elderly, chronically ill, and disabled consumers eligible for Medicare and Medicaid. It reported one operating segment, serving more than 33,000 consumers through 127 locations in 22 states. Illinois remained its largest market. The company is expanding through organic growth and acquisitions while seeking more business from managed care organizations.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net service revenue | $85.8 | $77.0 | $167.7 | $148.6 |
| Gross profit / margin | $23.7 / 27.6% | $20.6 / 26.7% | $45.6 / 27.2% | $39.2 / 26.4% |
| Operating income / margin | $5.1 / 5.9% | $4.1 / 5.3% | $8.7 / 5.2% | $7.9 / 5.3% |
| Net income / margin | $3.3 / 3.8% | $2.7 / 3.5% | $5.4 / 3.2% | $5.1 / 3.4% |
| Diluted earnings per share | $0.29 | $0.25 | $0.48 | $0.46 |
- Revenue grew 11.5% in Q2 and 12.8% for the first half. Management attributed growth mainly to higher average billable census: up 8.8% in Q2 and 10.0% year to date, including same-store growth of 6.4% and 7.4%, respectively. Revenue per billable hour increased 0.9% in Q2 and 1.4% year to date.
- Gross margin improved, which management attributed primarily to recent acquisitions with higher-margin business. General and administrative expense rose 13.1% in Q2 and 16.0% year to date; management cited higher wages, payroll taxes, stock compensation and system implementation costs, among other items. First-half net income growth lagged revenue growth, and net margin declined from 3.4% to 3.2%.
- First-half operating cash flow was $35.0, versus $15.0 in 2014, primarily reflecting lower accounts receivable. Investing used $5.2, including $4.25 for the Priority Home Health Care acquisition; financing used $1.2. Cash increased to $42.0 from $13.4 at year-end.
- At June 30, cash was $42.0, current assets $101.8, and current liabilities $45.1. Net accounts receivable was $47.1, down from $68.3 at year-end. DSO decreased to 50 days from 80; the Illinois Department on Aging DSO fell to 28 days from 85.
- No revolving loans were outstanding. The $55 million revolving facility had $39.6 million reported availability after letters of credit and borrowing-base limits. Capital lease obligations totaled $3.5 million; contingent earn-out obligations totaled $1.1 million. Management said cash and available borrowings should cover working-capital needs for at least 12 months.
Material changes and strategic developments
- Managed care organizations rose to 18.1% of revenue in both Q2 and the first half, from 6.2% and 5.3%, respectively, in 2014. Government programs still represented 77.7% of revenue.
- The Illinois Department on Aging contributed 48.0% of Q2 revenue and 47.9% of first-half revenue, down from 54.2% and 54.6% in the comparable periods. Illinois receivables declined to $16.9 million from $44.1 million at year-end after substantial second-quarter payments.
- The company acquired Priority Home Health Care in Ohio effective January 1, 2015, for $4.25 million. It also signed an agreement in April to acquire South Shore Home Health Service and Acaring Home Care for approximately $18 million to enter New York; the filing does not report that this transaction had closed by June 30.
Outlook, risks, and contingencies
- No quantitative earnings or revenue guidance was provided. Management expects continued growth from coordinated care, managed-care relationships, and selective acquisitions, but these are expectations rather than quantified guidance.
- Management warned that delayed or sporadic Illinois payments could increase receivables, reduce liquidity, and require facility borrowings. The company also faces reimbursement, budget, regulatory, and documentation risks affecting Medicaid and other government-funded services.
- Customer and geographic concentration remain significant: Illinois generated 58.7% of Q2 revenue and 58.4% for the first half. Receivables from government programs are subject to collection timing and eligibility or documentation disputes.
- The credit agreement includes financial and other covenants and restricts certain acquisitions without lender consent, including deals above $2 million or more than three acquisitions in a calendar year. The New York transaction’s proposed price exceeds that stated threshold; the filing does not specify whether lender consent was obtained.
- The company had recorded a $1.263 million reserve for potential pre-sale Medicare and Medicaid billing adjustments. It previously remitted $1.84 million to the U.S. government in March 2014 after identifying claim documentation errors. Management said ordinary-course legal and administrative proceedings were not expected to have a material effect.
- No impairment charges were recorded. The company identified no material changes to previously disclosed risk factors and reported effective disclosure controls as of June 30. It was evaluating the impact and transition method for the new revenue-recognition standard.
Important facts for investors to verify
- Whether Illinois payment timing remains favorable and whether receivables, DSO, and allowance coverage continue to improve.
- Whether managed-care and same-store census growth can persist, and whether acquisition-related margin gains offset rising administrative and labor costs.
- The status, financing, lender consent, and final purchase price for the proposed New York acquisition.
- Compliance with credit-facility covenants and actual borrowing availability, which is subject to borrowing-base calculations and outstanding letters of credit.
- Developments in Medicaid reimbursement, billing documentation, the $1.263 million reserve, and the company’s high Illinois and government-payor concentration.