Addus HomeCare Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; filed August 8, 2019. Addus provides personal care, hospice and home health services across 24 states through 162 offices. Amounts below are in millions of dollars unless stated otherwise.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Net service revenue | $149.7 | $131.3 | $288.9 | $240.7 |
| Gross profit / margin | $40.5 / 27.0% | $35.7 / 27.2% | $78.0 / 27.0% | $63.7 / 26.5% |
| Operating income / margin | $7.7 / 5.2% | $6.9 / 5.3% | $14.0 / 4.8% | $11.5 / 4.8% |
| Net income | $5.5 | $4.3 | $10.4 | $9.2 |
| Diluted earnings per share | $0.41 | $0.36 | $0.77 | $0.78 |
Q2 revenue increased 14.0%, operating income 11.6% and net income 27.8% year over year. For the first half, revenue grew 20.0% and net income 12.8%. Growth reflected higher personal-care billable hours and revenue per billable hour, acquisitions and rate increases in several states. Q2 gross margin eased 0.2 percentage points; higher direct-care salary costs weighed on personal-care margins. First-half G&A rose 23.8% to $59.5 million, faster than revenue, and increased to 20.6% of revenue from 20.0%.
Cash flow, balance sheet and debt
- First-half operating cash flow was negative $4.1 million, versus positive $20.2 million in 2018. The principal pressure was an $18.9 million increase in receivables; the Illinois Department on Aging receivable balance rose to $36.8 million from $24.3 million at year-end.
- Investing cash outflow was $31.8 million, mainly the $29.9 million VIP acquisition. Financing provided $20.3 million, including $19.6 million of term-loan borrowing. Cash declined to $54.8 million from $70.4 million.
- At June 30, accounts receivable was $132.8 million and total liabilities were $119.3 million. Credit-facility borrowings were $39.6 million: $20.0 million revolving and $19.6 million term debt. Revolver availability was $141.9 million; the company reported compliance with its covenants.
- Days sales outstanding increased to 81 from 71 at December 31; Illinois Department on Aging DSO rose to 82 from 55 days.
- Adoption of lease accounting in 2019 added $18.3 million of operating lease right-of-use assets and $18.8 million of lease liabilities; management said adoption did not significantly affect results or liquidity.
Material changes and business developments
- VIP Health Care Services was acquired June 1 for approximately $29.9 million, expanding personal care in New York and the New York City area. VIP contributed $4.4 million of revenue and $0.3 million of net income before corporate allocation in the reported period. Purchase accounting was preliminary.
- Personal-care revenue rose 10.5% in Q2; billable hours increased 6.5% and revenue per billable hour 3.8%. Hospice and home health revenue also increased, primarily reflecting the Ambercare acquisition in 2018.
- Hospice operating income was $2.6 million in Q2 versus $1.2 million; home health operating income was $0.3 million versus $0.1 million. These comparisons are affected by the segments’ limited operating history in the prior-year period after Ambercare.
- After quarter-end, Addus acquired Alliance Home Health Care for about $23.5 million and Foremost Home Care for about $1.4 million, funded with cash and revolving-credit borrowings.
Outlook, risks and unusual items
- The filing gives no specific earnings or revenue guidance. Management described expanded Medicare Advantage coverage for non-skilled in-home care, effective January 1, 2019, as a potential demand opportunity over the next three to five years. The Medicare home-health payment model (PDGM) was scheduled to take effect January 1, 2020; the relevant CMS rule was still proposed.
- Illinois concentration remains material: the Illinois Department on Aging generated 27.5% of Q2 revenue and 28.2% of first-half revenue, and represented 27.7% of net receivables at June 30. Payment delays or state budget disruption could pressure cash flow and increase borrowings. The fiscal 2020 Illinois budget included reimbursement increases intended to offset wage costs, with increases projected to take effect September 1, 2019 and January 1, 2020.
- Labor availability and minimum-wage increases, reimbursement rates, government and managed-care policy, acquisition integration, and geographic and payor concentration are identified risks. Managed-care organizations accounted for 36.8% of Q2 revenue, versus 33.3% a year earlier.
- Management said disclosure controls were not effective at June 30 because of a previously reported material weakness related to electronic visit verification controls. Remediation was underway and depended in part on vendor controls reporting and successful testing.
- A pending qui tam lawsuit alleges False Claims Act and Anti-Kickback Statute violations related to referrals at three Illinois senior living facilities. The government declined to intervene; Addus said it would defend the case and did not expect a material adverse effect.
- Variable-rate credit-facility debt was approximately $39.6 million. The filing estimated that a 100-basis-point rate increase would reduce first-half net income by about $0.1 million. No hedging arrangements were reported.
Important facts for investors to verify
- Whether Illinois receivables are collected on schedule and DSO improves, especially for the Illinois Department on Aging.
- Whether Illinois reimbursement increases take effect as projected and sufficiently offset wage inflation.
- Whether acquired businesses, including VIP and the post-quarter acquisitions, integrate successfully and contribute expected growth and margins.
- Progress in remediating the material weakness and evidence that disclosure controls are operating effectively.
- Developments in the Illinois litigation, as well as changes to reimbursement policy, labor costs and credit-facility covenant headroom.