Addus HomeCare Corporation — Q2 2017 Form 10-Q
Business context and reporting period
Unaudited results cover the quarter and six months ended June 30, 2017, compared with the same periods in 2016. Addus provides in-home personal care services; at quarter-end it served about 34,000 consumers through 110 locations in 24 states. Figures below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net service revenue | $103.6 | $100.9 | $205.2 | $193.5 |
| Gross margin | $28.5 (27.5%) | $25.7 (25.5%) | $55.8 (27.2%) | $50.0 (25.8%) |
| Operating income | $5.9 | $4.4 | $12.9 | $5.0 |
| Net income | $2.7 | $2.6 | $7.0 | $2.8 |
| Diluted earnings per share | $0.23 | $0.23 | $0.60 | $0.25 |
- Q2 revenue increased 2.6%; six-month revenue grew 6.0%. Six-month billable hours rose 4.1%, while revenue per billable hour increased 1.8%.
- Operating margin improved to 5.7% in Q2 from 4.4%, and to 6.3% for the six months from 2.6%. Six-month operating income and net income comparisons include a $2.1 million gain on the sale of adult day services centers.
- Interest expense increased to $2.1 million in Q2 and $2.8 million for the six months, primarily reflecting a $1.3 million write-off of old credit-facility issuance costs and higher debt under the replacement facility. The six-month effective tax rate was 32.1%, versus 30.4%.
- Cash from operations was negative $11.4 million for the six months, versus negative $18.3 million a year earlier. Investing activities provided $0.6 million; financing activities provided $18.6 million. Cash rose to $15.9 million from $8.0 million at year-end.
- At June 30, total current assets were $157.7 million and current liabilities $47.1 million. Net accounts receivable was $138.0 million, including a $9.1 million allowance; gross receivables were $147.1 million.
- Reported debt, net of issuance costs, was $44.0 million, including $45.0 million drawn on the new term loan and $1.7 million of capital leases. The company reported $86.5 million available under its revolving facility and compliance with its covenants.
Material changes versus the prior comparable period
- Gross margin expanded in both the quarter and six-month period, which management attributed mainly to lower direct-service wage, benefit, and travel costs.
- Q2 general and administrative expense rose 7.1% to $19.0 million, including higher administrative personnel costs, professional fees, and acquisition expenses. For the six months, G&A fell to $37.9 million from $38.6 million, helped by lower restructuring and telephone costs.
- Provision for doubtful accounts increased 14.2% in Q2 and 29.0% for the six months, partly due to managed-care and acquisition-transition reserves.
- The company replaced its prior facility on May 8 with a five-year, $250 million facility: $125 million revolver, $45 million term loan, and $80 million delayed-draw term loan. The delayed-draw and incremental term-loan capacity is limited to qualifying acquisitions.
- Adult day services operations were discontinued and three Illinois centers sold effective March 1; proceeds were about $2.4 million and the recorded pretax gain was $2.1 million.
Outlook, management commentary, and risks
- Management said cash and available credit should cover working-capital needs for at least the next 12 months. No specific earnings or revenue guidance was provided.
- Illinois remains a major concentration: it represented 52.7% of Q2 revenue, and the Illinois Department on Aging represented 36.7%. Delayed Illinois payments contributed to $73.8 million of aged receivables from that department and 197 days sales outstanding for that payor. The state enacted a fiscal 2018 budget on July 6; Addus reported receiving $69.4 million in delayed payments through August 4, 2017. Further payment timing and future budgets remain uncertain.
- Overall DSO rose to 121 days from 104 days at year-end. Continued payment delays could pressure liquidity, increase borrowings, or require other financing.
- Managed-care organizations increased to 31.3% of Q2 revenue from 24.3% a year earlier. The company sees managed care as a growth opportunity, while government reimbursement rates, program funding, labor costs, and union negotiations remain risks.
- The company completed its $23.2 million acquisition of Options Home Care in New Mexico on August 1, 2017, after quarter-end. It expects additional restructuring costs, but their timing and amount are not determinable.
- Pending matters include a False Claims Act/Illinois False Claims Act case, in which the state and federal government had declined to intervene at the reported dates, and an appeal connected to a provider lawsuit over Illinois payments. Management believes pending litigation will not materially affect the business, but outcomes are uncertain.
- Variable-rate debt exposes the company to rate increases; management estimated a 100-basis-point increase would reduce six-month net income by about $0.2 million. No hedges were in place. The company also expects the new lease-accounting standard to materially affect its balance sheet, though not liquidity.
Important facts for investors to verify
- Whether Illinois payment collections continued after the reported $69.4 million received through August 4, and the resulting receivables, aging, and DSO.
- Whether the improved gross margin and billable-hour growth are sustained, and whether higher doubtful-account provisions or administrative costs offset those gains.
- The effect of the new facility’s variable rates, covenants, borrowing availability, and acquisition-related financing on interest expense and leverage.
- Options Home Care’s post-acquisition performance and the cash/debt impact of its $23.2 million purchase price.
- Developments and potential financial exposure in the disclosed legal proceedings, labor negotiations, and remaining restructuring obligations.