Addus HomeCare Corporation — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; balance-sheet comparisons are with December 31, 2016. Financial amounts below are in millions unless otherwise stated.
Business context
Addus provides personal care services, primarily in consumers’ homes, and operates as one reportable segment. At September 30, it served approximately 35,000 consumers through 114 locations in 24 states. Government programs remained the largest payer category, while managed care organizations represented a growing share of revenue.
Financial results and liquidity
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net service revenue | $108.6 | $103.5 | $313.8 | $297.0 |
| Gross margin | $29.1; 26.8% | $27.4; 26.5% | $84.9; 27.1% | $77.4; 26.1% |
| Operating income | $5.8 | $2.5 | $18.7 | $7.5 |
| Net income | $3.4 | $1.7 | $10.4 | $4.5 |
| Diluted EPS | $0.29 | $0.15 | $0.89 | $0.40 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $42.6 | $31.0 |
Q3 revenue increased 4.9% year over year; nine-month revenue rose 5.6%. Nine-month net income increased 132.6%. Revenue growth reflected higher census and revenue per billable hour; the nine-month averages rose 3.8% and 2.4%, respectively. Q3 general and administrative expense declined to $19.4 million from $21.3 million, and its share of revenue fell to 17.8% from 20.6%.
For the nine months, operating cash flow was $42.6 million, investing cash outflow was $23.1 million, and financing cash inflow was $18.2 million. Cash at September 30 was $45.7 million, up from $8.0 million at year-end. Current assets were $148.3 million and current liabilities $55.3 million.
Debt carrying value, net of issuance costs, was $43.8 million, including $3.4 million current and $40.4 million long term; the new facility had $45.0 million of term loans outstanding. The company reported $97.9 million available under its revolving facility and compliance with its covenants. Nine-month net interest expense rose to $3.6 million from $1.7 million, partly due to a $1.3 million write-off of old facility issuance costs and higher term-loan balances. All $45.0 million of facility borrowings were variable-rate; a 100-basis-point increase would have reduced nine-month net income by about $0.3 million, or $0.03 per diluted share.
Material changes and unusual items
- Managed care revenue share increased to 34.0% in Q3 from 25.8%, and to 32.5% for the nine months from 24.4%. Government-program share declined correspondingly.
- Illinois Department on Aging revenue share remained material: 36.6% in both the Q3 and nine-month 2017 periods. Illinois represented 52.3% of Q3 revenue and 52.7% of nine-month revenue.
- The company acquired Options Home Care on August 1 for approximately $22.6 million, expanding its New Mexico footprint. It contributed $3.3 million of revenue and $0.2 million of net income in the reported periods. Purchase-price allocation was preliminary and included $17.9 million of goodwill.
- The company ceased its adult day services business and sold substantially all assets of three Illinois centers in March, receiving $2.4 million and recording a $2.1 million gain. Management cited the exit from lower-margin centers as a factor in improved gross margin.
- Restructuring and severance costs were $1.5 million for the first nine months, down from $8.3 million a year earlier. Management expected some additional costs but could not estimate their amount or timing.
- After quarter-end, on October 1, the company sold its 10% interests in two joint ventures and acquired substantially all assets of Sun Cities CareGivers/Sun Cities Homecare.
Outlook, risks and contingencies
- Management said cash and available credit, together with operating cash flow, should meet working-capital needs for at least the next 12 months. No quantified revenue or earnings guidance was provided.
- Illinois passed a fiscal 2018 budget in July 2017, and Addus reported receiving delayed payments and being paid for substantially all prior-state-fiscal-year claims by September 30. However, future budget delays could again impair collections and liquidity. Illinois receivables were $43.6 million at quarter-end, and Illinois Department on Aging receivables were 36.7% of total net receivables.
- Net receivables were $96.3 million; the allowance for doubtful accounts was $10.4 million, or 9.7% of gross receivables, versus 5.9% at year-end. Management attributed the higher reserve ratio to managed-care payors and acquisition transitions. Days sales outstanding improved to 82 from 104 days at year-end, but management cautioned that DSO could rise.
- A qui tam False Claims Act/Illinois False Claims Act case involving alleged kickbacks and referrals remained pending; the company said it would defend the case and did not expect a material adverse effect. The government declined to intervene, and a partial motion to dismiss remained unresolved.
- The company depends on government reimbursement and has substantial exposure to Illinois, faces potential payment and reimbursement changes, and has a workforce with significant union representation; its national SEIU agreement was under negotiation.
- The company expected the new revenue-recognition standard, effective January 1, 2018, to have a similar timing and measurement outcome, subject to final assessment. It expected the lease standard to materially affect the balance sheet but not liquidity.
Most important facts for investors to verify
- Whether Illinois payments remain timely and receivables, aging, and allowance coverage continue to improve.
- Whether managed-care growth translates into sustainable revenue and margins, given the increase in doubtful-account provisions.
- Options and Sun Cities acquisition performance, integration costs, and the final valuation of acquired goodwill and intangibles.
- Debt-facility availability, variable-rate exposure, covenant compliance, and capacity for additional acquisitions.
- Developments in the pending claims litigation, labor negotiations, and any further restructuring costs.