Addus HomeCare Corporation — Q3 2021 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2021; comparisons are with the third quarter and nine months ended September 30, 2020. Addus provides personal care, hospice and home health services across 22 states through 207 offices. It served approximately 64,000 individuals in the first nine months of 2021, versus 59,000 a year earlier. Financial amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Change |
|---|---|---|---|
| Net service revenue | $216.7 | $194.0 | +11.7% |
| Gross profit / margin | $67.0 / 30.9% | $56.3 / 29.0% | Margin +1.9 pts |
| Operating income / margin | $17.4 / 8.0% | $12.5 / 6.5% | +38.6% |
| Net income / margin | $11.6 / 5.3% | $9.1 / 4.7% | +27.0% |
| Diluted EPS | $0.72 | $0.57 | — |
For the first nine months, revenue was $639.9 million (+12.5%), operating income $46.6 million (+42.0%), and net income $32.1 million (+29.9%). Gross margin was 30.8%, versus 29.4%; diluted EPS was $2.00, versus $1.55.
- Segment trends: Q3 personal care revenue rose 2.2% to $169.6 million, but billable hours fell 3.1%; revenue per billable hour rose 5.5%. Hospice revenue increased 63.0% to $39.1 million, largely reflecting Queen City Hospice; segment gross margin declined to 51.4% from 56.2%, with management citing higher direct labor costs. Home health revenue grew 94.8% to $8.0 million, reflecting Armada and organic growth; segment gross margin improved to 37.5% from 34.3%.
- Cash flow: Nine-month operating cash flow was $14.3 million, down from $73.3 million. Management attributed the decline principally to timing of receivables and government stimulus funds. Investing cash outflow was $32.4 million, including $29.2 million for acquisitions; financing cash inflow was $25.4 million. Cash increased to $152.4 million from $145.1 million at year-end 2020.
- Debt and liquidity: Revolver borrowings were $224.9 million at a 2.08% interest rate; balance-sheet long-term debt, net of issuance costs, was $220.7 million. The amended facility provides $600 million of revolving commitments and matures July 30, 2026. The company reported $123.8 million available to borrow and compliance with financial covenants. Debt is variable-rate; a 100-basis-point increase would have reduced nine-month net income by an estimated $1.2 million.
- Other balance-sheet items: Accounts receivable, net, was $133.8 million; current liabilities were $112.5 million. Goodwill was $497.9 million, up from $469.1 million, primarily reflecting acquisitions.
Material changes and notable developments
- Armada was acquired August 1, 2021, for approximately $29.8 million, funded with revolver borrowings; it expanded home health and hospice services in New Mexico. Summit Home Health was acquired October 1, 2021, for approximately $8.1 million in cash, after quarter-end.
- Management attributed consolidated revenue and margin growth principally to Queen City Hospice, acquired in December 2020, and its comparatively higher-margin hospice business. Nine-month personal care revenue growth also reflected a 6.3% increase in revenue per billable hour.
- On July 30, 2021, the company amended its credit agreement, increased revolving commitments to $600 million, and extended maturity to 2026. It incurred approximately $3.0 million of debt issuance costs.
- Illinois authorized a $3.0 million bonus payment for earlier care services, recognized in Q2 and received in September. Illinois also funded a personal-care rate increase to $24.96, planned for January 2022; the state proposed advancing it to November 2021, subject to approval.
Outlook, risks and contingencies
- The filing provides no specific company-wide revenue, earnings or cash-flow guidance. Management said the effects of COVID-19 and related government measures remain difficult to predict.
- Caregiver and skilled-clinician shortages may constrain service capacity and raise labor costs. The company was monitoring potential federal and state vaccine requirements; it had not mandated employee vaccination and described efforts to encourage it.
- New York did not initially select the company as a Lead Fiscal Intermediary for its CDPAP program. The company protested and explored alternatives; it had materially suspended new patient admissions. Based on its current run rate, it estimated 2021 program revenue of $44 million and operating income of $3 million, both exposed to the unresolved process.
- A Medicare contractor requested repayment of $6.5 million related to Ambercare hospice claims. The company disputes the findings, is pursuing administrative appeals and stated it has a contractual right to full indemnification from the seller; the appeal outcome is uncertain.
- Absent congressional action, a separate PAYGO provision could reduce Medicare spending by up to 4% in fiscal 2022 beginning January 2022; the company could not determine whether or how it would be affected. Existing Medicare sequester relief was expected to end December 31, 2021.
- The company expected to repay half of its $7.1 million deferred employer payroll taxes in Q4 2021. Remaining Provider Relief Fund amounts were subject to eligible-use and reporting conditions, with unused funds expected to be returned. Payor COVID-19 advances of $6.7 million were deferred pending qualifying expenses or return.
Important facts for investors to verify
- Whether CDPAP contract awards or other arrangements preserve the company’s New York business, and the resulting revenue and operating-income exposure.
- Progress and outcome of the $6.5 million hospice repayment appeal, including enforceability and collection of seller indemnification.
- Caregiver and clinical-staff availability, wage trends, and the impact of any vaccine mandates on service delivery.
- Whether Illinois’ proposed timing for the rate increase is approved and whether future reimbursement rates offset wage pressure.
- Operating cash flow conversion, receivable collections, and the accounting and repayment status of COVID-19 advances and deferred payroll taxes.
- Acquisition integration and performance, including whether goodwill and preliminary purchase-price allocations remain supportable.
- Variable-rate debt exposure, borrowing availability, and continued covenant compliance as acquisition spending and interest rates change.