Addus HomeCare Corporation — FY2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012; filed March 28, 2013. The filing is an annual report, not a standalone Q4 filing. Unless noted, financial amounts below are in millions of dollars.
Business context and reporting period
Addus provides primarily nonmedical home and community-based care, including personal care, assistance with daily activities and adult day services. At year-end it operated 96 locations in 19 states and served an average billable census of 25,104. Government programs accounted for 94.9% of continuing-operations revenue; the Illinois Department on Aging alone contributed 57.3%.
Home health results are presented as discontinued operations. On March 1, 2013, after year-end, Addus sold substantially all of that business to LHC Group for approximately $20 million cash, retaining a 10% interest in California and Illinois operations. Two additional agencies were held for sale.
Financial performance and liquidity
| Metric | FY2012 | FY2011 |
|---|---|---|
| Continuing-operations revenue | $244.3 | $230.1 |
| Gross profit / gross margin | $64.1 / 26.2% | $61.5 / 26.7% |
| Operating income / margin | $15.7 / 6.4% | $12.9 / 5.6% |
| Continuing-operations net income | $9.3 | $8.4 |
| Net income (loss), including discontinued operations | $7.6 | ($2.0) |
| Adjusted EBITDA | $15.8 | $15.2 |
| Cash from operations | $15.4 | $15.9 |
| Cash at year-end | $1.7 | $2.0 |
| Total debt at year-end | $16.5 | $31.5 |
Revenue grew 6.2%, primarily with a 5.1% increase in average census and 6.5% more billable hours. Revenue per billable hour edged down to $16.98 from $17.04. Gross margin fell 0.5 percentage points, mainly reflecting higher workers’ compensation claim costs; general and administrative expense was 19.0% of revenue versus 19.9%.
Quarterly supplemental data show Q4 2012 revenue of $63.8 million and continuing-operations net income of $3.5 million, compared with $58.3 million and $2.9 million, respectively, in Q4 2011. Q4 2012 total net income, including discontinued operations, was $3.7 million versus $2.5 million.
Operating cash flow was slightly lower year over year. At December 31, 2012, the revolving facility had $16.3 million drawn and $27.1 million available; Addus reported compliance with its covenants. Illinois receivables rose $5.7 million to $53.1 million. Company-wide DSO improved to 86 days from 94; Illinois Department on Aging DSO was 122 days. Addus reported that $16.3 million of sale proceeds was used to repay the revolver in Q1 2013 and said it expected available credit and operating cash flow to cover needs for at least 12 months.
Material changes versus prior period
- Continuing-operations revenue and net income increased, while discontinued home health revenue declined 9.7% to $38.8 million. The home health business recorded a $1.7 million loss in 2012, versus a $10.4 million loss in 2011, which included a $16.0 million impairment charge.
- Total net income improved from a $2.0 million loss to $7.6 million profit, reflecting stronger continuing operations and a smaller discontinued-operations loss.
- Debt fell by approximately $15.1 million, including repayment of the subordinated dividend notes during 2012. Cash from operations declined by $0.5 million.
- Illinois increased as a revenue concentration: 64% of continuing revenue came from Illinois in 2012, compared with 58% in 2011; the Illinois Department on Aging share rose from 51.2% to 57.3%.
Outlook, risks, contingencies and unusual items
Management described the home health divestiture as a way to focus on the growing, profitable home and community-based business and managed-care opportunities. It anticipated administrative cost savings, but gave no quantified earnings or revenue guidance and cautioned that savings might not be fully realized.
- Illinois reimbursement and funding: The state had delayed payments. In March 2013, the Illinois Department on Aging warned it expected to exhaust appropriations for home and community-based services; Addus was told that substantially all billings for services from March 1, 2013 would be held pending additional appropriations. The filing says reimbursement for services from March through June 2013 was at risk absent further funding action.
- Payor and policy concentration: Nearly 95% of continuing revenue came from government programs. State budget cuts, reduced authorized hours or rates, eligibility changes, self-directed care, and transitions to managed care could reduce revenue or margins. Addus said 17 of the 19 states it served had initiated managed-care transition efforts and it could not assure favorable contracts or unchanged reimbursement.
- Sale-related exposure: Addus retained accounts receivable and certain liabilities from the home health business and agreed to indemnify the buyer for specified pre-sale claims, regulatory violations and reimbursement issues. Government audits and recoupments may reach back six years, or longer in certain circumstances.
- Other contingencies: Sellers of the Advantage acquisition disputed the approximately $0.7 million earn-out calculation; arbitration was pending and a final payment was expected in Q2 2013. Management said ordinary-course legal matters were not expected to materially affect financial position or results.
- Operating and financing risks: Approximately 73% of employees were union-represented, with labor agreements due for renegotiation at various times in 2013. The credit facility was secured, covenant-restricted, and scheduled to mature in November 2014; Addus had agreed to negotiate amendments, including a possible reduction in the revolving commitment, following lender consent to the sale.
Most important facts for investors to verify
- Whether Illinois appropriations were approved and delayed or withheld billings were collected, especially the $53.1 million year-end Illinois receivable.
- The completed home health sale accounting, actual debt repayment and post-sale borrowing availability, including any revised credit-facility terms.
- Whether continuing-operations growth and margins held up after the divestiture, given rising Illinois concentration and potential managed-care rate or authorization changes.
- The outcome and financial impact of the Advantage earn-out arbitration and any buyer indemnification, audit or reimbursement claims.
- Whether anticipated cost savings, labor negotiations and cash collection performance supported management’s liquidity outlook.