Addus HomeCare Corporation — Q2 2023 Form 10-Q
Business context and reporting period. The filing covers the quarter and six months ended June 30, 2023. Addus provides personal care, hospice and home health services across 22 states through 204 offices. Services are primarily funded by government programs and managed care organizations.
Financial performance and position
- Q2 revenue: $260.0 million, up 9.7% from $236.9 million. Personal care revenue grew 13.8% to $198.3 million; hospice declined 3.6% to $50.2 million; home health increased 8.7% to $11.5 million.
- Q2 earnings: Gross profit was $82.3 million (31.7% margin, versus 31.9%); operating income was $21.5 million (8.3% margin, versus 7.1%); net income was $14.9 million, up 32.0%. Diluted EPS was $0.91, versus $0.70.
- Six-month results: Revenue rose 10.4% to $511.6 million; net income increased 39.6% to $27.5 million. Gross margin was 31.4%, unchanged year over year. Operating income was $40.1 million, up 32.0%.
- Segment trends: Personal care operating income increased 26.1% in both the quarter and first half. Hospice operating income fell 19.8% in Q2 and 24.7% for the first half, reflecting lower revenue and higher direct labor costs. Home health operating income rose 93.0% in Q2 and 246.6% for the first half, from a smaller base.
- Cash flow: First-half operating cash flow was $60.4 million, versus $62.5 million. Investing used $2.7 million, including $0.9 million for CareStaff and $1.8 million for capital expenditures. Financing used $53.5 million, primarily to repay revolver borrowings. Cash increased to $84.2 million from $80.0 million.
- Debt and liquidity: Revolver borrowings were $81.4 million at June 30, down from $134.9 million at year-end; the reported net carrying value of long-term debt was $78.7 million. The borrowing rate was 6.95%. The company reported $319.9 million available to borrow, was compliant with its financial covenants, and had a $600 million revolving facility plus a $125 million incremental loan facility, with maturity in July 2026.
- Other balance-sheet measures: Current assets were $207.8 million and current liabilities $133.9 million. Net accounts receivable was $104.3 million, down from $125.5 million at year-end. Total assets were $928.4 million and stockholders’ equity $666.4 million.
Material changes and management commentary
- Personal care growth was primarily driven by higher revenue per billable hour, including reimbursement-rate increases; billable hours also grew. Illinois generated 45.7% of Q2 revenue and the Illinois Department on Aging alone accounted for 21.5%, representing notable geographic and payor concentration.
- Hospice census and admissions declined year over year in Q2; hospice gross margin fell to 47.0% from 51.0%. Management cited increased direct employee wages, taxes and benefits.
- Home health revenue growth reflected, in part, the October 2022 Apple Home acquisition. Its reported gross margin improved to 38.2% from 32.3%.
- Administrative expenses rose in dollars but declined as a share of revenue to 22.1% in Q2 from 23.3%. Interest expense increased as borrowing rates rose.
- Days sales outstanding improved to 36 days from 45 at year-end. Management attributed lower operating cash flow principally to timing of receivables and government stimulus funds.
Outlook, risks and unusual items
- The filing provides no company-specific revenue, earnings or EPS guidance. Management described liquidity as strong but cautioned that covenant compliance and access to financing are not assured.
- Labor availability, wage inflation and caregiver recruitment and retention remain important operating risks. Management said shortages could limit its ability to meet demand and noted higher staffing costs.
- A proposed CMS Medicaid rule would require, if finalized as proposed, at least 80% of certain Medicaid payments for home health, personal care and related services to go to direct-care-worker compensation. The ultimate effect is uncertain and could be adverse after implementation.
- Medicare hospice payment rates were scheduled to increase 3.1% effective October 1, 2023. The filing also discusses a potential additional Medicare sequestration reduction of up to 4%, delayed by Congress until 2025; the impact is uncertain.
- On August 1, 2023, after quarter-end, Addus acquired Tennessee Quality Care for approximately $106 million, funded with revolver borrowings, expanding hospice and home health operations in Tennessee.
- A Medicare contractor sought repayment of $6.5 million relating to historical hospice claims at Ambercare. Addus disputes the findings, is pursuing administrative appeals, and has a contractual indemnification right; the outcome cannot be predicted. Management believes pending proceedings will not materially affect the financial statements.
- ARPA-related deferred funding was $10.0 million at June 30, 2023 and is subject to spending and reporting requirements, with potential recoupment for unapproved or unspent amounts. The company also reported $2.9 million of deferred COVID-19 payor payments.
Key facts for investors to verify
- Whether personal care growth and margin performance can continue as reimbursement rates and labor costs change.
- Whether hospice census, admissions and margins stabilize, and how the Tennessee Quality Care acquisition affects results and debt.
- Actual post-acquisition borrowing levels, interest costs, covenant headroom and remaining facility availability.
- Developments in the proposed Medicaid payment rule, Medicare reimbursement and sequestration policy, and Illinois reimbursement rates.
- Outcome of the Ambercare repayment appeal and the company’s continued compliance with ARPA spending and reporting conditions.