Addus HomeCare Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless stated otherwise. Amounts are in U.S. dollars; financial statement amounts are generally in thousands.
Business context
Addus provides personal care services, principally in consumers’ homes. At quarter-end, it served more than 34,000 consumers through 111 locations in 24 states. Its business depends substantially on government-funded programs and is shifting toward managed care organizations (MCOs).
Financial performance and liquidity
- Revenue: $101.6 million, up 9.7%. Billable hours increased 8.4%, and revenue per billable hour rose 1.3% to $17.52.
- Profit and margins: Gross profit was $27.3 million, with gross margin of 26.9% versus 26.3%. Operating income was $7.0 million (6.9% margin), versus $0.7 million (0.7%). Net income was $4.3 million, or $0.37 per diluted share, versus $0.2 million, or $0.01 per diluted share.
- Cash flow: The cash flow statement reports $9.6 million provided by operations, compared with $6.0 million used in Q1 2016. Investing activities provided $1.2 million, including $2.4 million of sale proceeds, while financing activities provided $0.3 million. Cash increased to $19.2 million from $8.0 million at year-end.
- Balance sheet and debt: Total assets were $238.7 million and stockholders’ equity $164.6 million. Debt, net of issuance costs, totaled $24.4 million, including $23.8 million outstanding on the credit facility and $2.1 million of capital leases before debt issuance costs. The company reported $82.8 million available under its prior revolving facility at March 31.
- Receivables and liquidity: Net accounts receivable was $116.2 million; the doubtful-account allowance was $8.3 million, or 6.6% of gross receivables, versus 5.9% at year-end. Days sales outstanding were 103 days overall and 148 days for the Illinois Department on Aging.
Changes and unusual items
- Revenue growth reflected higher service hours and a modest increase in revenue per hour. Gross margin improved, partly due to a $0.5 million reduction in travel-related costs.
- General and administrative expense declined 5.8% to $20.9 million; the company attributed the reduction primarily to $2.6 million less severance and restructuring expense than in Q1 2016.
- Q1 2017 operating income included a $2.1 million pretax gain from selling substantially all assets of three Illinois adult day services centers. The company exited that business effective March 1 and received approximately $2.4 million in proceeds.
- Restructuring and severance expense was approximately $0.9 million; management expected some additional costs but could not estimate their amount or timing.
- The company adopted a new share-based compensation accounting standard prospectively on January 1, 2017, recording a $26,000 excess tax benefit in income tax expense. It also began using the Black-Scholes model to value stock options.
Outlook, risks and contingencies
- Illinois concentration and payment delays: Illinois generated 53.1% of Q1 revenue; the Illinois Department on Aging accounted for 36.5%. Illinois Department on Aging receivables were $58.8 million, including $56.2 million related to non-Medicaid consumers. The state had not enacted a comprehensive fiscal 2017 budget, and management warned that further payment delays could pressure liquidity and increase borrowing needs.
- Payor mix: MCOs increased to 32.3% of revenue from 23.1%; state, local and other government programs declined to 64.9% from 73.2%.
- Financing and acquisition developments after quarter-end: On May 8, 2017, the company entered a new five-year, $250 million secured credit facility, replacing the prior facility. It includes a $125 million revolver, a $45 million term loan and an $80 million delayed-draw term loan, with customary covenants and borrowing conditions. On April 24, the company agreed to acquire Options Home Care for approximately $23.2 million, with closing expected in Q3 subject to customary conditions.
- Legal matters: A qui tam lawsuit alleges False Claims Act and anti-kickback violations relating to referrals; the company filed a motion to dismiss the amended complaint in April 2017 and intends to defend the case. A separate Illinois provider lawsuit concerning state funding was dismissed, and the plaintiffs appealed. Management stated it did not expect pending proceedings to have a material effect.
- Other risks and outlook: The filing gives no numerical earnings or revenue guidance. It identifies reimbursement and budget uncertainty, receivable collectability, labor negotiations and variable-rate debt as risks. Management said available credit and operating cash were expected to cover working capital needs for at least 12 months; it reported compliance with prior-facility covenants at March 31.
Important facts for investors to verify
- Track Illinois budget developments, collections, aging of the $58.8 million Illinois Department on Aging receivable and related allowance adequacy.
- Assess whether reported earnings growth is sustainable after excluding the $2.1 million adult day-center sale gain and considering restructuring costs.
- Review the new credit agreement’s covenants, actual borrowings, acquisition funding and the final terms and completion of the Options Home Care acquisition.
- Reconcile cash-flow figures: the cash flow statement reports operating cash flow of $9.615 million and financing cash flow of $0.290 million, while the MD&A cash-flow table reports $9.633 million and $0.272 million, respectively.
- Monitor the False Claims Act litigation and appeal in the Illinois provider funding case for material developments.