Addus HomeCare Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; comparisons are with the corresponding 2021 periods. Addus provides personal care, hospice and home health services. Amounts below are in millions, except per-share data and where noted.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net service revenue | $240.5 | $216.7 | $704.1 | $639.9 |
| Gross profit / margin | $75.2 / 31.3% | $67.0 / 30.9% | $221.0 / 31.4% | $197.1 / 30.8% |
| Operating income / margin | $17.5 / 7.3% | $17.4 / 8.0% | $47.9 / 6.7% | $46.6 / 7.3% |
| Net income | $11.5 | $11.6 | $31.3 | $32.1 |
| Diluted EPS | $0.71 | $0.72 | $1.94 | $2.00 |
| Net interest expense | $2.4 | $1.6 | $6.0 | $4.0 |
- Q3 revenue rose 11.0%; year-to-date revenue increased 10.0%. Hospice and home health drove much of the growth, including contribution from acquisitions; personal care grew more modestly.
- Gross margin improved year over year, largely reflecting the larger contribution from higher-margin hospice. However, higher G&A as a share of revenue and higher interest expense weighed on earnings. Q3 operating margin declined to 7.3% from 8.0%.
- Segment revenue in Q3: personal care $179.2 million, up 5.6%; hospice $51.4 million, up 31.4%; home health $10.0 million, up 25.1%. Home health reported a $0.1 million segment operating loss, versus $1.5 million income a year earlier.
- For the first nine months, personal care revenue increased 2.4%, hospice 34.8%, and home health 75.0%. Home health segment operating income fell to $1.0 million from $3.0 million; hospice segment operating income increased to $39.2 million from $29.6 million.
Cash flow, balance sheet and liquidity
- Operating cash flow was $80.8 million for the first nine months, versus $14.3 million in 2021. Management attributed the increase primarily to timing of receivable collections and government stimulus funds; it should not be assumed to represent a recurring run rate.
- Investing cash outflow was $87.4 million, primarily for acquisitions; financing cash outflow was $56.7 million. Cash declined to $105.6 million at September 30, 2022, from $168.9 million at year-end 2021.
- Revolver borrowings were $166.9 million gross ($163.6 million net of issuance costs), down from $224.9 million gross at year-end. The disclosed interest rate was 5.11%, versus 2.10% at year-end. The facility matures July 30, 2026; reported available borrowing capacity was $200.5 million. The company said it was in compliance with financial covenants.
- Accounts receivable, net, was $126.3 million, down from $137.0 million at year-end; days sales outstanding improved to 46 from 54. Total assets were $945.9 million and stockholders’ equity was $614.8 million.
- Government stimulus advances, a current liability, were $21.2 million, compared with $4.2 million at year-end. This included $17.0 million of deferred ARPA funding and $4.1 million of deferred payroll taxes due by December 31, 2022.
Material developments, outlook and risks
- Acquisitions: JourneyCare hospice and palliative operations were acquired February 1, 2022 for approximately $86.6 million. They contributed $12.2 million of Q3 revenue and $2.4 million of Q3 operating income. On October 1, after quarter-end, Addus acquired Apple Home HealthCare for approximately $12.2 million, with up to approximately $2 million of contingent consideration.
- New York CDPAP: The company was not selected in the state’s fiscal-intermediary procurement process, filed a protest with no response reported, and materially suspended new admissions. State legislation provided a path for eligible existing intermediaries to continue contracting, subject to requirements and a process expected to proceed to a January 2023 contract award. The company said it was assessing its future participation.
- Labor and reimbursement: Management cited competitive labor markets, wage inflation, staffing shortages and vaccine requirements as cost and service-capacity risks. It also noted government-program reimbursement changes and significant dependence on public payors. Illinois represented 43.5% of nine-month revenue; the Illinois Department on Aging alone represented 20.8%.
- Medicare and public-health policy: The full 2% Medicare sequestration reduction resumed July 1, 2022. A possible additional PAYGO reduction of up to 4% was delayed to 2023; the company said its eventual impact was uncertain. ARPA funds may be subject to recoupment if spending or reporting requirements are not met.
- Interest-rate exposure: All reported revolver borrowings were variable-rate debt. Management estimated that a 100-basis-point increase would reduce net income by about $0.5 million for Q3 and $1.6 million for the first nine months. No hedging arrangements were reported.
- Contingency: A Medicare contractor sought $6.5 million related to hospice claims at Ambercare. Addus disputes the findings and is pursuing administrative appeals; it reported a contractual indemnification right from the seller. Management said pending proceedings were not expected to have a material effect, but the appeal outcome was uncertain.
- Guidance: The filing provides no specific earnings or revenue guidance. Management described liquidity as strong, while cautioning that future covenant compliance and access to financing could not be assured. The COVID-19 impact remained difficult to predict; management did not expect it to materially adversely affect the business.
Most important facts for investors to verify
- Whether organic hospice growth and margins sustain performance as acquisition contributions and integration costs evolve.
- Whether staffing and wage pressures continue to erode home health and personal care profitability.
- The outcome and timing of New York CDPAP contracting, and any resulting revenue or operating changes.
- Cash generation excluding working-capital and stimulus timing effects, alongside acquisition spending and debt repayment.
- Variable-rate borrowing costs, covenant headroom, and the company’s reported $200.5 million of available borrowing capacity.
- Compliance with ARPA spending requirements and repayment of deferred payroll taxes by the stated deadline.
- Developments in the $6.5 million hospice repayment appeal and the related indemnification claim.