Addus HomeCare Corporation — Q2 2013 Form 10-Q
Business context and reporting period
Quarter and six months ended June 30, 2013. Addus provides home and community-based services, primarily to elderly, chronically ill, and disabled consumers. Effective March 1, 2013, it sold substantially all of its home health business for approximately $20 million, retaining a 10% interest in certain California and Illinois operations. The sold business is reported as discontinued operations; continuing operations are reported as one segment.
Financial performance and liquidity
| Metric | Q2 2013 | Q2 2012 | Six months 2013 | Six months 2012 |
|---|---|---|---|---|
| Continuing-operations revenue | $65.8 million | $60.4 million | $128.8 million | $119.3 million |
| Gross profit / margin | $16.6 million / 25.3% | $15.8 million / 26.2% | $32.4 million / 25.2% | $30.8 million / 25.8% |
| Operating income | $4.0 million | $3.2 million | $7.7 million | $6.5 million |
| Continuing-operations net income | $2.6 million | $1.8 million | $5.3 million | $3.6 million |
| Net income, including discontinued operations | $2.4 million | $1.5 million | $15.7 million | $2.1 million |
| Diluted EPS, continuing operations | $0.23 | $0.17 | $0.48 | $0.33 |
- Q2 continuing revenue grew 8.8%; six-month revenue grew 7.9%. Management attributed growth primarily to higher billable hours and census. Q2 average billable census rose 4.5%, and billable hours rose 8.6%; six-month census rose 7.0% and billable hours 7.8%.
- Gross margin declined 0.9 percentage point in Q2 and 0.6 point for the six months, primarily due to higher workers’ compensation expense. G&A was $12.1 million in Q2 and $23.6 million year to date; as a share of revenue it declined to 18.4% and 18.3%, respectively.
- Six-month net income includes an $11.1 million after-tax gain on the home health sale ($18.8 million pretax). The continuing business remained profitable; discontinued home health operations reported a $0.7 million after-tax loss for the six months.
- Six-month operating cash flow was $34.2 million versus $5.7 million in 2012. It included substantial working-capital cash inflow, particularly from collections; investing cash flow included $19.7 million of net sale proceeds. Financing cash outflow was $16.5 million, mainly debt repayment.
- At June 30, cash was $38.8 million, versus $1.7 million at year-end 2012. Accounts receivable was $43.6 million net, down from $71.3 million. Total debt was zero, compared with $16.5 million at year-end; revolving-credit availability was $42.6 million, with approximately $12.4 million of letters of credit outstanding. The company reported compliance with credit-facility covenants.
- Current assets were $95.4 million and current liabilities $41.8 million. Stockholders’ equity was $110.3 million; total assets were $155.2 million.
Changes, outlook, risks, and unusual items
- The sale shifted the business away from a loss-making home health operation and reduced debt, while concentrating results in home and community-based care. Management said the transaction enables greater focus on that business and its growth opportunities.
- Illinois remained a major collection and concentration risk: it represented 59.3% of six-month continuing revenue, and its Department on Aging accounted for 59.3%. Management reported a significant late-June state payment, reducing the state receivable to $29.3 million from $53.1 million at year-end, but did not expect payments at that pace to continue and anticipated receivables and days sales outstanding to rise later in 2013. Continuing-operations DSO was 62 days at June 30 versus 92 days at year-end.
- Approximately 94.2% of six-month continuing revenue came from state, local, and other governmental programs. Budget shortfalls, reimbursement delays or reductions, eligibility changes, service-hour limits, and shifts to managed care could affect revenue and liquidity. The Illinois Department on Aging changed reimbursement methods effective May 1; management estimated the change would have reduced revenue by about $0.2 million for Q2 and $0.8 million for the six months, without reducing service costs.
- Management believed cash, credit availability, and operating cash flow would cover working-capital needs for at least 12 months. No specific earnings or revenue guidance was provided. The effect of Medicaid expansion and related federal funding changes was described as uncertain.
- A $0.7 million contingent earn-out related to the Advantage acquisition was disputed and submitted to arbitration; final payment was expected in Q3 2013. The home health sale also carries indemnification obligations related to pre-sale claims and regulatory matters; the company had not recorded a reserve and said the amount could not then be estimated.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting. The company expected to become an accelerated filer and warned of added compliance costs and execution risk in meeting Sarbanes-Oxley Section 404 requirements. Ordinary-course legal proceedings were not expected by management to have a material effect.
Important facts for investors to verify
- Whether Illinois reimbursement delays recur, and whether receivables, DSO, and borrowing needs increase as management anticipated.
- Whether continuing-operations revenue and margins can sustain growth given government-payor concentration and rising workers’ compensation costs.
- The quality and timing of operating cash flow, particularly the extent to which recent cash generation reflects one-time receivable collections and sale proceeds.
- The outcome and payment amount of the Advantage earn-out arbitration, and any liabilities arising from home health sale indemnifications or audits.
- Progress on accelerated-filer and Section 404 compliance, and the associated costs or control findings.