Addus HomeCare Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Addus provides personal care, hospice and home health services across multiple states. Unless otherwise noted, amounts below are in U.S. dollars; financial statement figures are in millions.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net service revenue | $169.8 | $137.7 | $458.7 | $378.4 |
| Gross profit | $46.0 | $36.8 | $124.0 | $100.5 |
| Gross margin | 27.1% | 26.7% | 27.0% | 26.5% |
| Operating income | $7.3 | $6.0 | $21.2 | $17.5 |
| Continuing-operations net income | $5.4 | $3.6 | $15.8 | $12.8 |
| Net income, including discontinued operations | $4.9 | $3.6 | $15.2 | $12.8 |
- Q3 revenue increased 23.3%; continuing-operations net income rose 49.8%. Nine-month revenue increased 21.2% and continuing-operations net income rose 23.3%.
- Diluted EPS was $0.34 for Q3 2019 ($0.38 from continuing operations), versus $0.28 in Q3 2018. Nine-month diluted EPS was $1.12 ($1.16 from continuing operations), versus $1.06.
- Q3 and nine-month net income included a $0.6 million discontinued-operations expense for settlement of a lawsuit.
- Cash provided by operations was $8.1 million for the first nine months, down from $24.7 million. Accounts receivable used $22.3 million of cash, reflecting revenue growth and collection timing; capital expenditures were $3.1 million.
Financial position and liquidity
- At September 30, 2019, cash was $239.6 million, accounts receivable net was $138.0 million, total assets were $619.1 million and stockholders’ equity was $470.0 million. Cash at December 31, 2018 was $70.4 million.
- Total debt, net of issuance costs, was $60.2 million, including $43.5 million drawn on the revolver and $19.4 million on the term loan. Revolver availability was $134.1 million; the company reported compliance with credit covenants. Debt matures May 2023.
- The September public offering generated $172.9 million net proceeds from 2.3 million shares. Cash and equity increases therefore reflect substantial new equity financing, not operating cash generation alone.
- Operating lease liabilities were $18.5 million following adoption of the new lease standard. Adoption had no significant effect on results or liquidity.
- Days sales outstanding rose to 75 from 71 at year-end; DSO for the Illinois Department on Aging increased to 65 from 55 days.
Material changes and operating trends
- Management attributed growth to higher personal-care billable hours and revenue per hour, acquisitions, same-store activity and rate increases in several states. Personal-care billable hours rose 11.1% and revenue per billable hour rose 8.5% in Q3.
- Q3 revenue by segment was personal care $154.6 million, hospice $10.9 million and home health $4.4 million. Segment operating income was $23.5 million, $3.6 million and $0.7 million, respectively.
- Hospice and home health expanded rapidly from a smaller base. Q3 segment revenues rose 52.8% and 80.3%, respectively, with acquisitions contributing to growth.
- General and administrative expense rose 27.2% in Q3, faster than revenue, and increased to 21.2% of revenue from 20.5%. For the nine months it rose 25.1%, to 20.8% of revenue from 20.2%.
- Managed-care organizations represented 41.4% of Q3 revenue, versus 33.3% a year earlier. State, local and other government programs remained a significant source of personal-care revenue.
Acquisitions, outlook and risks
- Addus acquired VIP Health Care Services for approximately $29.9 million in June and Alliance Home Health Care for approximately $23.5 million in August 2019. The acquisitions expanded personal care and other services in New York and New Mexico.
- On October 1, 2019, after quarter-end, the company acquired Hospice Partners for approximately $130 million, funded with offering proceeds. The business operates 21 locations in six states; purchase-price allocation was still being assessed.
- The filing provides no quantitative earnings or revenue guidance. Management identified Medicare Advantage’s expanded coverage of certain non-skilled in-home care as a potential opportunity over the next three to five years. CMS’s proposed home-health Patient-Driven Groupings Model was scheduled to take effect January 1, 2020; the proposed rule had not yet been finalized.
- Key risks include reimbursement and government-budget changes, delayed Illinois payments, minimum-wage increases and uncertainty over related reimbursement offsets, workforce availability, payer and geographic concentration, and integration and performance of acquisitions. The Illinois Department on Aging accounted for 25.9% of nine-month revenue; Illinois represented 39.1%.
- Variable-rate borrowings expose the company to interest-rate risk; a 100-basis-point increase was estimated to reduce nine-month net income by $0.2 million. The filing also warns that LIBOR’s anticipated cessation or modification could affect borrowing costs or refinancing.
- A prior material weakness in internal control over financial reporting remained unremediated, and management concluded disclosure controls were not effective at September 30, 2019. Remediation included strengthening controls related to electronic visit verification and obtaining or otherwise addressing the vendor’s SOC 1 Type 2 report.
- A False Claims Act lawsuit was settled for $0.6 million, recorded in discontinued operations, and dismissed in full on October 15, 2019. Management stated other pending proceedings were not expected to have a material effect.
Important facts for investors to verify
- Whether Illinois reimbursement increases receive CMS approval and whether state and agency payments remain timely, given rising receivables and DSO.
- Hospice Partners’ integration, operating contribution and acquisition-related financing or costs after the October 1 closing.
- How much cash remains after the Hospice Partners purchase and how management allocates remaining offering proceeds or repays debt.
- Whether operating cash conversion improves as revenue and receivables grow.
- Whether management remediates the disclosed material weakness and establishes effective financial-reporting controls.