Addus HomeCare Corporation — Q3 2018 Form 10-Q
Business context and period. This unaudited filing covers the quarter and nine months ended September 30, 2018, compared with the corresponding 2017 periods. Addus provides in-home personal care, hospice and home health services. Following its Ambercare acquisition, it reported three segments; at quarter-end it operated in 24 states through 156 offices.
Financial performance
Amounts below are in millions, except per-share data and margins.
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net service revenue | $137.6 | $108.6 | $378.3 | $313.8 |
| Gross profit / margin | $36.7 / 26.7% | $29.1 / 26.8% | $100.3 / 26.5% | $84.9 / 27.1% |
| Operating income / margin | $5.9 / 4.3% | $5.8 / 5.4% | $17.4 / 4.6% | $18.7 / 6.0% |
| Net income / margin | $3.5 / 2.6% | $3.4 / 3.1% | $12.7 / 3.4% | $10.4 / 3.3% |
| Diluted EPS | $0.28 | $0.29 | $1.06 | $0.89 |
- Quarterly revenue rose 26.7%; management attributed growth primarily to the Arcadia and Ambercare acquisitions and 3.7% same-store growth. Nine-month revenue rose 20.6%, including 4.0% same-store growth.
- Operating income was nearly flat in Q3 and declined 7.1% year to date, despite higher revenue. Higher general and administrative costs and lower reported gross margins weighed on results. Net income increased 4.0% for Q3 and 22.5% year to date; the year-to-date comparison also reflects lower income taxes.
- ASC 606 adoption shifted most amounts previously presented as doubtful-account expense into an implicit price concession deducted from revenue: $2.4 million in Q3 and $6.8 million for nine months. Management said the change reduced revenue and gross margin and was substantially a presentation/classification shift.
- Quarterly segment operating income was $22.2 million for personal care, $1.9 million for hospice and $0.1 million for home health. Hospice and home health segment reporting began following Ambercare’s May 2018 acquisition; direct prior-year segment comparisons are therefore unavailable.
Cash flow, liquidity and debt
- Cash was $147.5 million at September 30, 2018, versus $53.8 million at December 31, 2017. Current assets were $261.1 million and current liabilities $62.3 million.
- Nine-month operating cash flow was $24.7 million, down from $42.6 million. Management attributed the decrease primarily to accounts-receivable movements; 2017 included significant Illinois collections after a state budget was enacted.
- Investing cash outflow was $65.7 million, mainly for acquisitions; financing provided $134.8 million, including $76.6 million net equity-offering proceeds and $60.4 million in term-loan borrowings. Cash increased $93.7 million over the period.
- At September 30, term-loan borrowings were $103.2 million, at a 4.60% interest rate, and revolving-facility availability was $88.6 million after letters of credit and borrowing limits. Balance-sheet debt, net of issuance costs and including capital leases, was $101.2 million; cash exceeded that carrying amount by about $46.3 million.
- On October 31, 2018, the company amended and restated its facility, providing for a $250 million revolver and $19.6 million delayed-draw term loan, with maturity in May 2023. The agreement includes leverage and interest-coverage covenants, acquisition and distribution restrictions, and collateral over substantially all relevant assets.
Material developments, outlook and risks
- 2018 acquisitions included Ambercare, Arcadia and LifeStyle, as well as Arcadia affiliate branches. Ambercare expanded the company into hospice and home health in New Mexico. Preliminary purchase accounting added $43.7 million of goodwill during the first nine months.
- The August equity offering included 1.39 million primary shares and 1.02 million shares sold by an existing holder; Addus received approximately $76.6 million net from its primary issuance. Shares outstanding increased to 13.10 million at October 31.
- After quarter-end, Addus agreed to acquire VIP Health Care Services for approximately $28 million, with closing expected in Q1 or Q2 2019 subject to regulatory approvals. The company expected to use its delayed-draw facility and cash on hand. No formal earnings or financial guidance is provided in the filing.
- Management identified Medicare Advantage coverage of non-skilled in-home care, effective January 1, 2019, as a potential growth opportunity over the next three to five years. This is an opportunity, not a quantified forecast.
- Illinois Department on Aging revenue concentration remained significant: 29.5% of Q3 revenue and 31.8% of nine-month revenue. Prior payment delays were resolved by September 30, but future state budget or payment delays could pressure liquidity. Chicago wage increases without matching reimbursement adjustments could also hurt results.
- Other risks include government reimbursement and eligibility changes, managed-care contract and authorization shifts, labor costs and union negotiations, integration and contingent liabilities from acquisitions, variable-rate debt, and hospice Medicare payment caps. The company was below hospice caps for federal fiscal 2018 and recorded no cap liability.
- A False Claims Act lawsuit alleging improper referrals was narrowed by the court to home health services at three Illinois senior facilities. The company intends to defend the case and believes it will not materially affect results; the government declined to intervene. Management also expects the new lease standard to materially affect the balance sheet, but not liquidity.
- Management reported effective disclosure controls as of September 30, 2018 and no material change in internal control over financial reporting during the quarter. It found no substantial doubt about the company’s ability to continue as a going concern.
Most important facts for investors to verify
- Whether acquisition-driven growth translates into stronger operating income and margins, given the Q3 and year-to-date margin declines.
- Organic growth and billable-hour trends, while separating acquired revenue and the ASC 606 presentation effect.
- Illinois collections, payor concentration, receivable aging and the potential effects of reimbursement or wage changes.
- Post-amendment debt usage, covenant headroom, variable interest-rate exposure and funding for the planned VIP acquisition.
- Acquisition integration, preliminary purchase accounting, contingent consideration and hospice cap exposure.
- Developments in the False Claims Act litigation and the balance-sheet effect of lease-standard adoption.