Addus HomeCare Corporation (NASDAQ: ADUS) — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; comparisons are with the corresponding 2022 periods. Amounts below are in millions unless otherwise noted. The filing is unaudited.
Business context
Addus provides personal care, hospice, and home health services in 22 states through 220 offices. It served approximately 77,000 individuals in the first nine months of 2023, versus 62,000 in the same period of 2022. Revenue is substantially dependent on government programs and managed care organizations.
Financial performance
| Metric | Q3 2023 | Q3 2022 | 9M 2023 | 9M 2022 |
|---|---|---|---|---|
| Net service revenue | $270.7 | $240.5 | $782.3 | $704.1 |
| Gross profit | $86.7 | $75.2 | $247.5 | $221.0 |
| Gross margin | 32.0% | 31.3% | 31.6% | 31.4% |
| Operating income | $22.8 | $17.5 | $63.0 | $47.9 |
| Net income | $15.4 | $11.5 | $42.9 | $31.3 |
| Diluted EPS | $0.95 | $0.71 | $2.63 | $1.94 |
Q3 revenue rose 12.6% year over year and net income rose 33.5%. For the first nine months, revenue increased 11.1% and net income increased 37.3%. Personal care revenue grew 12.7% in Q3, primarily on higher revenue per billable hour. Home health revenue rose 57.9%, substantially reflecting acquisitions; hospice revenue increased 3.4%.
For the first nine months, gross margin improved modestly, while operating margin rose to 8.0% from 6.7%. Management attributed stronger personal care margins to higher revenue per billable hour and lower direct payroll costs as a share of revenue. Hospice margins weakened: nine-month segment operating income fell 20.0% to $31.4 million, as labor costs rose and gross margin declined to 46.2% from 50.6%.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $82.2 million, versus $80.8 million in 2022. Investing used $113.9 million, including $109.8 million of acquisitions; financing provided $31.5 million.
- Cash was $79.8 million at September 30, 2023, compared with $80.0 million at December 31, 2022. Current assets were $211.2 million and current liabilities $139.6 million.
- Revolver borrowings were $166.4 million gross ($163.9 million net of issuance costs), up from $134.9 million gross at year-end 2022. The credit facility matures July 2026. The company reported $275.6 million available to borrow and compliance with financial covenants; the maximum total net leverage covenant is 3.75:1.00.
- All borrowings are variable rate. Management estimated that a 100-basis-point increase would reduce nine-month net income by $0.7 million, or $0.05 per diluted share. Interest expense rose to $8.0 million for the first nine months from $6.3 million.
- The filing contains inconsistent September 30 borrowing-rate disclosures: Note 8 states 7.17%, while the Liquidity and Capital Resources discussion states 5.11%. The value is not clear from the filing text and should be reconciled.
Material changes, outlook, and risks
- Acquisition: On August 1, 2023, Addus acquired Tennessee Quality Care for approximately $111.2 million, funded primarily with a $110.0 million revolver draw. It added home health and hospice operations in Tennessee. Preliminary purchase accounting included $79.3 million of goodwill and $26.7 million of identifiable intangible assets. Since acquisition, it contributed $6.9 million of revenue and $1.5 million of operating income.
- New York operations: The state notified Addus on June 6, 2023 that it received a CDPAP contract award; the company resumed new fee-for-service admissions that had been materially suspended.
- Rate and policy outlook: Illinois has budgeted an increase in in-home care rates to $28.07 per hour effective January 1, 2024, subject to federal approval. CMS’s proposed Medicaid rule could require at least 80% of certain payments to be spent on direct-care worker compensation; the ultimate impact is uncertain. Medicare hospice rates increased 3.1% effective October 1, 2023. The filing provides no specific company-wide earnings or revenue guidance.
- Operating risks: Management cited continued caregiver and skilled-staff competition, inflation, and higher labor costs. Illinois accounted for 44.9% of nine-month company revenue; the Illinois Department on Aging alone accounted for 21.2%. Changes to reimbursement, program rules, or payment timing could materially affect results.
- Other items: The company had $7.8 million of deferred government stimulus advances, including ARPA-related funds subject to spending and reporting requirements and possible recoupment. A $6.5 million Medicare repayment request concerning acquired Ambercare remains under appeal; Addus disputes the findings and reports it has been reimbursed under an acquisition indemnity. Management does not expect pending proceedings to materially affect financial position or results.
Investor verification priorities
- Reconcile the disclosed 5.11% versus 7.17% borrowing rate and confirm the interest-rate basis used for debt and sensitivity analysis.
- Assess Tennessee Quality Care integration, final purchase-price adjustments, and whether acquired operations can sustain reported growth and margins.
- Track hospice labor costs and segment profitability, and distinguish acquisition-driven home health growth from same-store trends.
- Confirm federal approval and implementation of the Illinois rate increase, and monitor potential Medicaid compensation requirements and related reimbursement offsets.
- Monitor Illinois and other major payor concentration, collections, government-fund compliance, and headroom under debt covenants.