Addus HomeCare Corporation — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; filed November 7, 2014. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Business context
Addus provides home and community-based services, primarily personal care, to more than 32,000 consumers through 132 locations in 22 states. Services are largely funded by governmental programs, with managed care an increasing focus. The company reports one operating segment following the 2013 sale of substantially all of its home health business; home health results are presented as discontinued operations.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net service revenue, continuing operations | $81.7 | $67.3 | $230.3 | $196.1 |
| Gross profit | $21.8 | $17.2 | $61.1 | $49.6 |
| Gross margin | 26.7% | 25.6% | 26.5% | 25.3% |
| Operating income | $5.0 | $4.3 | $12.8 | $12.0 |
| Operating margin | 6.1% | 6.3% | 5.6% | 6.1% |
| Net income from continuing operations | $3.2 | $2.8 | $8.3 | $8.0 |
| Net income per diluted share, continuing operations | $0.29 | $0.25 | $0.75 | $0.73 |
- Q3 revenue grew 21.3%; nine-month revenue grew 17.5%. Average billable census rose 18.4% in Q3 and 24.0% year to date. Management attributed growth to both same-store expansion and acquisitions.
- For the nine-month period, total net income was $8.3 million versus $18.3 million a year earlier. The prior-year result included an $11.1 million after-tax gain on the home health business sale; continuing-operations income increased 3.5%.
- Gross margin improved, which management attributed to lower-than-expected workers’ compensation expense and higher-margin acquisitions. G&A expense rose faster than revenue, including costs for acquisitions, IT, consulting, legal work, and Sarbanes-Oxley compliance.
- Operating cash flow was $7.6 million for the first nine months, down from $25.1 million. Management cited prior-year deferred-tax cash benefits and collections of receivables as key comparison factors. Investing used $13.1 million, including acquisitions and capital spending; financing provided $4.1 million, mainly from capital leases.
Financial position and liquidity
- At September 30, cash was $14.1 million; net accounts receivable was $62.1 million; current assets were $91.5 million and current liabilities were $46.0 million.
- No borrowings were outstanding under the revolving credit facility. The $55 million facility expires in November 2019; reported availability was $40.3 million, after letters of credit and borrowing-base limits. Management said cash and expected facility availability should cover working-capital needs for at least 12 months.
- Capital lease obligations totaled $3.9 million, of which $1.0 million was current. The leases finance property and equipment at the new corporate headquarters.
- Receivables from the Illinois Department on Aging were $42.7 million, or 59.1% of total accounts receivable. The balance declined from $44.4 million at year-end; days sales outstanding declined to 70 from 85 days.
Material changes, outlook, and risks
- Acquisitions and expansion: In June 2014, Addus acquired Aid & Assist in Tennessee for stated consideration of $8.2 million, including a $1.0 million estimated contingent earn-out. The acquisition contributed $3.3 million of Q3 and $4.4 million of nine-month revenue. The company also completed earlier acquisitions in several states.
- Payor and geographic concentration: Government programs generated 85.9% of Q3 and 88.6% of nine-month revenue. The Illinois Department on Aging represented 52.1% and 53.7%, respectively. Management warned that delayed or sporadic Illinois payments could pressure liquidity and require additional borrowing.
- Credit terms: A November 6, 2014 amendment, retroactive to September 30, reduced the LIBOR margin from 4.6% to 3.5% and raised the 2014 capital-expenditure limit. Covenants include leverage, fixed-charge coverage, capital-spending, and acquisition restrictions.
- Billing matter: After identifying documentation errors in Medicare claims, the company voluntarily remitted $1.84 million in March 2014 and accrued a further $1.48 million estimate for remaining billing adjustments related to the sold home health business.
- Controls: Management concluded disclosure controls were not effective at quarter-end because two previously identified material weaknesses remained: IT access, segregation-of-duties and change-management controls, and payroll controls. The company described consultant support and control redesign efforts.
- Employment and reimbursement risks: The filing discusses possible cost and penalty exposure from wage-and-hour and healthcare employment requirements. Federal minimum-wage and overtime protections for direct care workers were delayed until July 2015, with enforcement discretion afterward. Medicaid funding, reimbursement rates, and program rules are also risks.
- Guidance: The filing provides no numerical earnings or revenue forecast. The company was evaluating the impact of the new revenue-recognition standard, effective for it in 2017.
Investor facts to verify
- Whether Illinois payments remain timely and the state receivable concentration continues to decline.
- Progress in remediating the IT and payroll material weaknesses, and whether subsequent filings report effective controls.
- Actual acquisition performance, final purchase-price allocations, and contingent earn-out payments.
- Whether workers’ compensation savings persist and G&A growth moderates as acquisition and compliance costs evolve.
- The financial and operational effects of direct-care wage-and-hour requirements and any related reimbursement changes.
- The amount and timing of remaining billing adjustments, and any further developments in the underlying claims review.