Addus Homecare Corp annual report, FY2015

Full document

Addus HomeCare Corporation: FY 2015 Form 10-K

Business and reporting period. This annual report covers the fiscal year ended December 31, 2015; it is not a standalone fourth-quarter filing. Addus provides primarily nonmedical home- and community-based personal care and adult day services, reporting as one segment. At year-end it operated 119 locations in 22 states and served more than 32,000 consumers. Its business is heavily exposed to government reimbursement and increasingly includes managed-care contracts.

Financial results and liquidity

  • Revenue: Continuing-operations net service revenue was $336.8 million, up 7.6% from $312.9 million. Average billable census grew 5.6%, billable hours 6.7%, and revenue per billable hour 0.9%. Acquisitions contributed to growth.
  • Profit and margins: Gross profit was $91.3 million, with gross margin of 27.1% versus 26.8%. Operating income fell 11.3% to $16.0 million, and operating margin declined to 4.8% from 5.8%, as general and administrative expenses rose 13.9% to $70.5 million. Continuing-operations net income was $11.4 million, down 5.1%; total net income was $11.6 million versus $12.2 million. Diluted EPS was $1.04 versus $1.10.
  • Fourth quarter, as disclosed in the annual report: Revenue was $84.8 million versus $82.6 million in Q4 2014; continuing-operations net income was $3.1 million versus $3.6 million, and total net income was $3.3 million versus $3.9 million.
  • Adjusted EBITDA: $23.6 million, essentially flat with $23.8 million in 2014. This is a non-GAAP measure and should be considered alongside GAAP results.
  • Cash flow: Operating cash flow was $4.1 million, down from $7.0 million. The company used $10.7 million in investing activities, principally for acquisitions and property/equipment, and $2.6 million in financing activities. Cash declined to $4.1 million from $13.4 million.
  • Working capital and debt: Net accounts receivable rose to $85.0 million from $68.3 million; days sales outstanding increased to 92 from 80. Current assets were $102.6 million and current liabilities $42.2 million. No revolving credit borrowings were outstanding at year-end; reported total debt of $3.0 million consisted of capital lease obligations. Revolver availability was about $58.3 million, subject to borrowing-base and EBITDA limits. The company reported compliance with credit covenants.

Changes, outlook, risks and unusual items

  • Payor mix and concentration: Managed-care revenue share rose to 18.3% from 9.1%, while state, local and other government programs declined to 77.7% from 86.4%. Illinois represented 59.5% of continuing revenue; the Illinois Department on Aging alone represented 48.8%.
  • Illinois payment delays: The filing says Illinois had not paid the company under its Department on Aging agreements since June 30, 2015. Receivables attributable to delayed Illinois payments were stated at $35.2 million; total Illinois governmental receivables were $50.4 million. Management warned further delays could pressure liquidity and require increased borrowing.
  • Guidance and strategy: No specific revenue or earnings guidance is provided. Management expects to pursue organic growth, managed-care relationships, coordinated-care capabilities and selective acquisitions, and stated that cash plus available credit should cover working-capital needs for at least 12 months. The filing does not provide a quantified outlook.
  • Acquisitions and subsequent events: Addus acquired Priority Home Health Care and certain Five Points Healthcare of Virginia assets during 2015. The New York acquisition of South Shore and Acaring closed February 5, 2016 for $20.5 million, funded by a $22.0 million delayed-draw term-loan borrowing. Addus also acquired Lutheran Social Services of Illinois adult day-care assets for about $144,000 in February 2016. On January 12, 2016, it drew $10 million on its revolving credit line.
  • Controls and reporting: Management found a material weakness in internal controls over revenue and payroll, including segregation of duties, user access, transaction monitoring, and review of employee/payroll changes. Management and the auditor concluded internal control over financial reporting was ineffective at year-end; the auditor issued an adverse opinion on controls. The financial-statement audit opinion was unqualified.
  • Legal and regulatory exposure: A qui tam complaint filed in January 2016 alleges improper referrals connected to the former home-health business; the government declined to intervene at that time. Addus said it would defend the case and did not expect a material adverse effect. The company also retains indemnification obligations for pre-sale home-health claims and audits. Other risks include Medicaid rate, eligibility and authorized-hours reductions; labor costs and union negotiations; compliance and billing audits; and rising minimum-wage/overtime costs.
  • Other notable item: The company voluntarily remitted $1.8 million to the government in 2014 after identifying Medicare documentation errors and maintained a $754,000 indemnification reserve at year-end 2015. The 2015 reduction in that reserve included $448,000 for periods no longer subject to Medicare audit. No goodwill impairment was recorded.

Investor verification priorities

  1. Track collection of Illinois receivables, the timing of state payments, and any resulting revolver borrowing or covenant headroom.
  2. Assess remediation and independent testing of the material weakness, especially revenue and payroll controls, and whether future filings report effective controls.
  3. Monitor Illinois budget and Community Care Program decisions, including effects on consumer eligibility, authorized hours, rates and the largest customer relationship.
  4. Review acquisition funding, integration, performance and the resulting debt and liquidity position, including the New York acquisition.
  5. Follow the False Claims Act litigation and remaining indemnification/audit exposure from the sold home-health business.
  6. Reconcile ongoing growth and gross-margin improvement with lower operating income, higher overhead, weaker operating cash flow and increased receivables.