Addus HomeCare Corporation — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; balance-sheet figures are as of March 31, 2013. Unless stated otherwise, amounts below are in millions of dollars. The filing presents unaudited results.
Business context
Addus provides home and community-based personal care services, primarily under government-funded programs. After selling substantially all of its home health business effective March 1, 2013, the company reported that business as discontinued operations and operated as one continuing segment, with more than 96 locations in 19 states.
- The sale to LHC Group covered home health assets in Arkansas, Nevada and South Carolina and 90% of the business in California and Illinois, for approximately $20 million cash. Addus retained 10% ownership in the California and Illinois operations.
- Continuing operations generated 95.0% of revenue from state, local and other governmental programs. Illinois accounted for 65.5% of continuing-operations revenue; the Illinois Department on Aging alone accounted for 59.5%.
Financial results and liquidity
| Metric | Q1 2013 | Q1 2012 | Change / context |
|---|---|---|---|
| Continuing-operations revenue | $63.0 | $58.9 | Up 7.0% |
| Gross profit / margin | $15.8 / 25.1% | $15.0 / 25.5% | Margin down 0.4 percentage points |
| Operating income | $3.7 | $3.3 | Up 12.8% |
| Continuing-operations net income | $2.7 | $1.7 | Up 53.9%; effective tax rates were 24.0% and 40.1% |
| Net income, including discontinued operations | $13.3 | $0.6 | Includes $11.1 after-tax gain on the home health sale |
| Operating cash flow | $13.0 | $(1.3) | Improved with working-capital changes and operating income |
| Cash at quarter-end | $17.8 | $1.3 | Q1 2013 opening balance was $1.7 |
Gross margin pressure reflected higher auto claim expenses, partly offset by more billed hours per consumer and leverage of field wage costs. G&A was $11.5 million, compared with $11.6 million, and represented 18.3% of revenue versus 19.6%. Interest expense declined to $0.2 million from $0.4 million. Diluted earnings per share were $1.23, including $0.98 from discontinued operations; continuing-operations diluted EPS was $0.25.
- Investing cash flow was $19.5 million, principally from $19.7 million net sale proceeds. Financing cash flow was $(16.5) million, primarily reflecting repayment of $16.25 million on the revolving facility and $0.21 million on the term loan.
- Long-term debt was zero at March 31, following repayment of the revolving balance and term loan. The $55 million revolving facility expires November 2014; reported borrowing availability was $47.6 million, after letters of credit and borrowing-base limits. The company was in covenant compliance.
- Current assets were $91.2 million and current liabilities $40.5 million. Accounts receivable, net, was $60.6 million, down from $71.3 million at year-end. Continuing-operations DSO improved to 81 days from 92 days; the largest payor’s DSO was 99 days versus 122 days.
Changes, outlook and risks
- Continuing-operations growth was driven mainly by average billable census rising 5.3% and billable hours rising 7.0%; revenue per billable hour was essentially flat at $16.96 versus $16.97. The home health business being sold had revenue of $6.5 million, down 28.3%, and an after-tax operating loss of $0.5 million, compared with a $1.1 million loss.
- Management said the divestiture allows the company to focus on its growing, profitable home and community business, reduces debt and adds cash. Management believed cash, operating cash flow and available credit would cover working-capital needs for at least 12 months and support selected acquisitions, subject to lender consent. No numerical earnings or revenue guidance was provided.
- Illinois payment delays remain a significant liquidity and concentration risk. The state’s outstanding receivable fell to $45.2 million from $53.2 million, but the filing states that the Illinois Department on Aging projected a funding shortfall and held substantially all billings for services beginning March 1 pending additional appropriations. The filing says reimbursement for services from March 1 through June 30 could be at risk absent funding action.
- Illinois Department on Aging reimbursement-method changes effective May 1, 2013 were estimated to have reduced Q1 revenue by approximately $0.6 million, with no corresponding cost reduction, if they had applied from January 1.
- Other risks include state budget cuts, reimbursement-rate or eligibility changes, managed-care transitions, sequestration and complex government-program billing and audit rules. In connection with the sale, Addus indemnified the purchaser for certain pre-closing healthcare-law and reimbursement liabilities; the company had not recorded a reserve and could not estimate the likelihood or amount. An earn-out dispute from the 2010 Advantage acquisition was submitted to arbitration, with final payment expected in Q2 2013.
- The reported tax rate benefited from employment tax credits, including a one-time benefit for credits earned in 2012 but recorded in 2013. Management reported no Q1 impairment charges and assessed ordinary-course legal proceedings as not expected to have a material effect.
Important facts for investors to verify
- Whether Illinois appropriations and payment processing resolved the stated reimbursement risk, and how much of the $45.2 million receivable was collected.
- The ongoing effect of the May 1 Illinois reimbursement changes on revenue and margins, and whether the estimated $0.6 million quarterly impact is representative.
- Post-sale performance of continuing operations, including census, billable hours, gross margin and dependence on Illinois and government payors.
- Actual cash available under the credit facility after any amendment required by the home health sale, and any subsequent borrowing or covenant changes.
- Any purchaser indemnification claims or government audit adjustments relating to pre-closing home health operations, and the final Advantage earn-out determination and payment.
- How much of reported Q1 net income and cash generation is repeatable: the $11.1 million after-tax sale gain was unusual, and operating cash flow benefited from working-capital movements.