Addus HomeCare Corporation — Form 10-Q Summary
Reporting period: Quarter ended September 30, 2016; comparisons are with the quarter and nine months ended September 30, 2015. Amounts below are in U.S. dollars; financial statement amounts are converted from thousands to millions unless stated otherwise.
Business context
Addus provides personal care services, principally in consumers’ homes, and adult day services. At quarter-end, it served more than 34,000 consumers through 118 locations in 24 states. State and local government programs remained the largest payer category, while managed-care organizations represented a growing share of revenue. Illinois, particularly the Illinois Department on Aging, remained a significant geographic and payer concentration.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net service revenue | $103.5M | $84.3M | $297.0M | $252.1M |
| Gross profit / margin | $27.4M / 26.5% | $23.5M / 27.9% | $77.4M / 26.1% | $69.1M / 27.4% |
| Operating income / margin | $2.5M / 2.4% | $4.3M / 5.1% | $7.5M / 2.5% | $13.0M / 5.2% |
| Net income | $1.7M | $2.9M | $4.5M | $8.3M |
| Diluted EPS | $0.15 | $0.26 | $0.40 | $0.74 |
- Cash flow: Nine-month operating cash flow was $31.0M, compared with $8.8M in 2015; investing cash outflow was $21.6M, including $20.4M for acquisitions; financing cash inflow was $26.0M. Cash ended at $39.4M, versus $4.1M at December 31, 2015.
- Debt and availability: September 30 debt was $25.0M on the balance sheet, including $24.4M under the credit facility and $2.2M in capital leases, offset by $1.6M of unamortized debt issuance costs. Revolver borrowings had been repaid in August. Reported remaining credit-facility availability was $69.5M.
- Liquidity and receivables: Current assets were $133.0M and current liabilities $50.4M. Net accounts receivable was $80.5M; the doubtful-account allowance was $7.2M, or 8.2% of gross receivables, up from 5.4% at year-end 2015. DSO improved to 72 days from 92 days.
Material changes versus prior periods
- Revenue rose 22.7% in Q3 and 17.8% for the nine-month period. Management attributed the increase primarily to the South Shore acquisition and higher billable census. Q3 average billable census increased 5.8%; nine-month census increased 3.3%.
- Profitability weakened despite revenue growth: gross margin declined 1.4 percentage points in Q3 and 1.3 points year to date. Management cited South Shore’s lower margins. Operating income fell 41.8% in Q3 and 42.0% year to date; net income declined 41.1% and 46.3%, respectively.
- General and administrative expense rose 28.6% in Q3 and 23.4% year to date. Drivers included restructuring and severance, higher bad-debt expense, and increased administrative employee costs. Depreciation and amortization also increased, partly due to acquired intangibles.
- Managed-care share of revenue increased to 25.8% in Q3 and 24.4% year to date, from 18.1% and 18.2%, respectively. Government-program share declined, though Illinois remained a major concentration.
- Interest expense increased as the company used its credit facility to fund operations and the South Shore acquisition. The effective tax rate declined to 14.6% in Q3 and 25.2% year to date, principally reflecting federal employment tax credits.
Outlook, risks, contingencies, and unusual items
- Management said cash from operations and available credit were expected to cover working-capital needs for at least the next 12 months. It provided no specific revenue or earnings guidance and said additional restructuring costs were expected, but their amount and timing were undetermined.
- Illinois enacted a stopgap budget on June 30, 2016. Addus reported receiving approximately $65.4M of the $65.7M owed for services through June 30. However, the state had not adopted a comprehensive budget for fiscal 2017; payment delays could impair liquidity, increase borrowing needs, or require other financing.
- Illinois Department on Aging revenue represented 42.6% of Q3 revenue and 43.6% of nine-month revenue. Illinois governmental receivables were $39.6M at quarter-end. Government reimbursement, budget and collection delays, and payer concentration are material exposures.
- The company recorded approximately $8.3M of pretax streamlining costs in the first nine months of 2016, including severance and costs associated with closing three Illinois adult day centers, unused contact-center space, vendor-contract terminations, and discontinued software. Accrued severance and restructuring costs totaled $3.9M at quarter-end.
- A False Claims Act lawsuit alleges anti-kickback violations and improper referrals relating primarily to a home-health business largely sold in 2013. The government declined to intervene at that time; the company filed a motion to dismiss, and the court’s decision was pending. Management said it intended to defend the case and did not expect a material adverse effect.
- An Illinois provider lawsuit concerning state contract payments was dismissed with prejudice; plaintiffs appealed. Management assessed the outcome of pending proceedings as not expected to materially affect financial position or results.
- Disclosure controls were deemed ineffective because of a previously identified material weakness involving segregation of duties, user access, billing and payroll monitoring, and data validation. Management reported remediation efforts and additional post-closing procedures; it stated the financial statements fairly presented the periods shown.
- Variable-rate debt was approximately $24.4M. The filing estimated that a 100-basis-point rate increase would have reduced net income by about $0.1M for each of the three- and nine-month periods, with no hedging arrangements in place.
Most important facts for investors to verify
- Whether Illinois adopts a comprehensive budget and pays future claims on time, and whether the reported $65.4M collection and lower DSO are sustained.
- Whether Addus can stabilize margins and earnings as acquired lower-margin business, restructuring costs, and elevated bad-debt expense affect results.
- How the South Shore acquisition performs and whether its preliminary purchase-price allocation, including $5.1M of goodwill and $10.0M of identifiable intangibles, is finalized without material adjustment.
- Whether the company remediates the material weakness in billing, payroll, access, and monitoring controls, and whether controls are independently shown to be effective.
- Developments in the False Claims Act litigation, the Illinois provider appeal, and the expected timing and amount of additional restructuring costs.
- Credit-facility covenant compliance, borrowing availability, interest-rate exposure, and the company’s ability to fund acquisitions and operations without increasing leverage materially.