Addus HomeCare Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; unaudited. Dollar amounts below are in millions unless noted. Addus provides home and community-based personal care and home health services through 125 locations in 19 states, serving more than 27,000 consumers.
Financial performance
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Net service revenue | $68.3 | $67.2 | $135.1 | $131.8 |
| Gross profit | $20.1 | $19.7 | $39.2 | $38.6 |
| Gross margin | 29.5% | 29.4% | 29.0% | 29.3% |
| Operating income | $2.7 | $3.3 | $4.7 | $6.0 |
| Operating margin | 3.9% | 4.9% | 3.5% | 4.5% |
| Net income | $1.3 | $1.7 | $2.2 | $3.0 |
| Diluted EPS | $0.12 | $0.16 | $0.20 | $0.29 |
For the first half, operating cash flow was $29.1 million versus $0.8 million in 2010, chiefly reflecting collections and a $17.6 million accounts-receivable cash-flow benefit. Investing used $0.6 million and financing used $5.2 million. Cash rose to $24.1 million from $0.8 million at year-end. The filing attributes the cash increase largely to a substantial Illinois payment received at the end of June.
At June 30, accounts receivable, net, was $51.3 million; current assets were $90.8 million and current liabilities $45.0 million. Total debt was $40.0 million, including $30.5 million drawn on the revolver, $4.0 million on the term loan and $5.6 million in subordinated dividend notes. Revolver availability was reported at $14.1 million, including the July credit amendment. The revolver rate was 4.8%; the company reported compliance with its covenants. After quarter-end, it paid approximately $25.5 million against the revolver using the Illinois receipt; the filing does not state the resulting updated cash, debt or availability.
Material changes and segment trends
- Q2 revenue increased 1.6% year over year; first-half revenue increased 2.5%. Advantage, acquired in July 2010, contributed to growth. Excluding that acquisition, home health revenue declined 5.5% in Q2 and 3.5% in the first half; management cited Medicare rate reductions and weaker non-Medicare revenue.
- Home and community revenue rose 1.6% in Q2 and 2.2% in the first half. Segment operating income improved to $6.0 million in Q2 and $11.3 million in the first half. Billable hours were slightly lower, while revenue per billable hour increased.
- Home health operating income fell 50.2% to $0.8 million in Q2 and 42.9% to $1.5 million in the first half. Higher administrative costs—including interim management consulting, data processing and travel—contributed. Medicare average weekly census declined year over year, although admissions increased.
- Consolidated operating margin fell to 3.9% in Q2 from 4.9%; first-half net income declined 27.4%. Corporate expenses rose as Addus expanded infrastructure, while home health administrative costs weighed on results.
Outlook, risks and unusual items
- No quantified company revenue or earnings guidance is provided. Management said cash from operations and available credit were expected to cover working-capital needs for at least 12 months.
- Illinois payment timing remains a significant liquidity risk. The state-related net receivable fell from $47.7 million at year-end to $27.2 million at June 30, but management did not expect the unusually high payment level to continue and anticipated receivables and DSO could rise. Illinois Department on Aging generated 41.8% of first-half revenue; Illinois and California together generated 65.5%.
- Government reimbursement and regulation are key risks. CMS’s proposed 2012 home health rule included a 5.06% reduction to standardized episode rates, among other payment changes; this was a proposal, not a finalized rate in the filing. The report also discusses face-to-face certification requirements, quality reporting, potential Medicare and Medicaid reductions, and possible deficit-reduction cuts.
- The Illinois Attorney General was investigating administration of the Veterans Deserve program. Addus was cooperating but could not assess any financial or operational impact. An IPO-related class action settlement of $3.0 million, covered by insurance, had court approval but was not yet final; effectiveness depended on no appeal by August 25, 2011. A related derivative settlement was also conditional on finality of the class settlement.
- Goodwill was $63.9 million. Management reported no impairment at the October 2010 annual test but identified reimbursement pressures and state budget constraints as potential impairment indicators; market capitalization was below book equity. A future impairment could materially affect reported results.
- The Advantage acquisition included a contingent earn-out; $0.5 million was paid in April, and a further $1.1 million was accrued, potentially payable in Q2 2012. The company also recorded $2.1 million of workers’ compensation insurance recovery receivables with a corresponding liability under new presentation guidance.
Important facts for investors to verify
- Whether Illinois collections remain sufficient to prevent renewed receivable growth and increased revolver borrowings; monitor DSO, which was 65 days at June 30 versus 90 days at year-end.
- The post-quarter impact of the $25.5 million revolver payment on cash, debt, borrowing availability and covenant headroom.
- Whether home health operating performance improves after new divisional leadership began in July, and whether reimbursement reductions or census trends further pressure margins.
- Final CMS rules and any federal or state budget actions affecting Medicare, Medicaid and state-funded services.
- Final status and any remaining exposure related to the IPO settlements, the Attorney General investigation, and the Advantage earn-out.