Addus HomeCare Corporation — Q2 2012 Form 10-Q
Reporting period: Three and six months ended June 30, 2012; balance-sheet figures are as of June 30, 2012. Unless stated otherwise, financial amounts are in millions of dollars. The company provides home and community care and home health services through 117 locations in 19 states.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Net service revenue | $70.281 | $68.252 | $138.205 | $135.094 |
| Gross profit | $20.419 | $20.110 | $39.060 | $39.164 |
| Operating income | $2.604 | $2.690 | $4.075 | $4.696 |
| Net income | $1.464 | $1.333 | $2.093 | $2.186 |
| Diluted EPS | $0.14 | $0.12 | $0.19 | $0.20 |
- Q2 revenue grew 3.0%; gross margin was 29.1% versus 29.5%, and operating margin was 3.7% versus 4.0%. Net income increased 9.8% year over year.
- For the first half, revenue grew 2.3%, but gross profit fell slightly and operating income declined 13.2%. Net income decreased 4.3%.
- Home and community revenue rose 6.6% in Q2 and 5.9% in the first half, supported by higher census and billable hours. Q2 average census rose 4.2%, billable hours rose 7.7%, and revenue per billable hour declined 1.0%. Segment operating income increased to $7.078 million from $6.020 million.
- Home health revenue fell 12.2% in Q2 and 12.8% in the first half. Admissions declined, and closed or sold agencies reduced revenue. Q2 segment operating loss was $0.047 million, versus $0.840 million income a year earlier; first-half loss was $1.210 million versus $1.538 million income.
- First-half home health revenue included a $0.9 million reduction to estimated accrued Medicare revenue recorded in Q1. Excluding it, management reported a 44.3% home health gross margin and a 2.0% operating loss margin for the first half.
Cash flow, balance sheet and debt
- First-half operating cash flow was $5.732 million, down from $29.098 million. Management attributed the decline primarily to delayed receivable collections, producing a $16.4 million year-over-year cash decrease from accounts receivable.
- Investing cash use was $0.259 million; financing cash use was $6.000 million, mainly debt repayments. Cash declined from $2.020 million at year-end 2011 to $1.493 million at June 30, 2012.
- Net accounts receivable was $69.141 million, compared with $72.368 million at year-end. Gross receivables were $75.088 million and the allowance was $5.947 million. Days sales outstanding were 87 days, versus 94 at year-end.
- Illinois receivables increased to $49.3 million from $47.4 million. The Illinois Department on Aging represented 48.8% of Q2 revenue and 62% of accounts receivable at June 30.
- Total debt was $25.527 million: $22.000 million on the revolving facility, $1.458 million on the term loan, and $2.069 million in subordinated dividend notes. The revolving facility had $16.237 million available; its stated interest rate was 4.8%. The company reported compliance with credit-facility covenants.
- Current assets were $85.388 million and current liabilities $39.836 million. Management said available revolver borrowings together with operating cash flow should meet working-capital needs for at least 12 months.
Changes, outlook and key risks
- Home and community segment growth and improved cost productivity were offset by home health weakness and higher corporate expenses. The company sold a Portland, Oregon home health agency in February for approximately $0.525 million, recording a $0.495 million pretax gain.
- No earnings guidance was provided. Management’s liquidity outlook relies on operating cash flow and remaining credit-facility availability.
- Reimbursement and regulatory changes are material risks. CMS’s 2012 home health rate changes reduced the national episode rate; CMS proposed for 2013 a 1.5% payment update offset by a 1.32% case-mix adjustment. The filing warns that further Medicare payment reductions could hurt revenue, profit and liquidity.
- Government programs are a substantial revenue source, and Illinois is especially important. Illinois delayed provider payments and enacted Medicaid spending reductions; the company cited possible effects from rate cuts, utilization controls, eligibility changes and managed-care shifts. Delayed state reimbursements may pressure liquidity and increase revolver usage.
- Medicare and Medicaid billing estimates, collection assumptions and regulatory compliance create additional uncertainty. The company noted that actual collections may differ from its estimates. Ordinary-course legal and administrative proceedings were not expected by management to have a material effect.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether Illinois reimbursement delays persist and how the $49.3 million Illinois receivable balance converts to cash.
- Whether home health admissions, margins and segment profitability stabilize, including the impact of Medicare rate changes and the $0.9 million Q1 revenue-estimate adjustment.
- Whether available revolver capacity remains sufficient as the permitted EBITDA add-back phases out and the company meets its fixed-charge and leverage covenants.
- Whether Illinois Medicaid reductions, eligibility changes and managed-care implementation affect authorized hours, census, reimbursement or service demand.
- The timing and amount of the remaining Advantage acquisition earn-out payment, described as expected in Q3 2012, and the subordinated dividend notes’ December 2012 maturity.