Addus HomeCare Corporation — FY 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. Although the request references 2011 Q4, this is an annual filing; quarterly Q4 figures are shown separately below. Amounts are in U.S. dollars.
Business context
Addus provides non-medical home and community care and skilled home health services to more than 26,000 consumers through 118 locations in 19 states. Home and community services generated 81.1% of 2011 revenue; home health generated 18.9%. Government programs represented approximately 80% of revenue. Illinois was the largest concentration: the Illinois Department on Aging generated 43.2% of revenue, and Illinois operations represented 56% of total revenue.
Financial performance and liquidity
| Metric | FY 2011 | FY 2010 |
|---|---|---|
| Net service revenue | $273.1 million | $271.7 million |
| Gross profit / margin | $81.8 million / 30.0% | $79.9 million / 29.4% |
| Operating income (loss) / margin | ($4.2) million / (1.5%) | $12.0 million / 4.4% |
| Net income (loss) | ($2.0) million | $6.0 million |
| Adjusted EBITDA | $15.2 million | $16.3 million |
| Cash from operating activities | $15.9 million | $10.7 million |
| Cash at year-end | $2.0 million | $0.8 million |
| Total debt | $31.5 million | $45.2 million |
Revenue rose 0.5%, while adjusted EBITDA declined 6.7%. The operating loss primarily reflects a $16.0 million non-cash impairment of home health goodwill and intangible assets. The company reported $2.3 million of Illinois prompt-payment interest income, recognized when received; the amount and timing of any further receipts are uncertain. Year-end net accounts receivable was $72.4 million, days sales outstanding rose to 94 from 90, and the Illinois Department on Aging receivable was $47.4 million. The reported current ratio was approximately 2.1, but liquidity is highly dependent on collections.
At year-end, $24.8 million was drawn on the revolving facility, with $21.8 million reported as available borrowing capacity; availability depends partly on adjusted EBITDA and lender accommodations. The company said cash and available credit, together with operating cash flow, should cover working capital needs for at least 12 months. It was in compliance with credit covenants at December 31, 2011. Debt includes $4.1 million of 10% subordinated dividend notes due in 2012.
Q4 results and changes versus comparable periods
Q4 2011 revenue was $68.6 million, down from $70.1 million in Q4 2010. Gross profit was $21.6 million versus $21.2 million; operating income was $4.0 million versus $3.2 million; and net income was $2.5 million versus $1.5 million. Q4 diluted earnings per share were $0.23 versus $0.14.
Annual home and community revenue was nearly flat, with segment operating income improving to $26.2 million from $22.7 million. Home health revenue increased 1.3% including the Advantage acquisition, but declined 4.1% excluding it; segment operating results moved from $5.3 million income to a $14.2 million loss, including the impairment. Medicare revenue per completed episode fell 8.9% to $2,399. Total debt decreased by $13.7 million year over year.
Outlook, commentary, and principal risks
- No specific company revenue or earnings guidance is provided. Management describes growth plans focused on existing markets, coordinated care, private-duty services, managed-care partnerships, and selective acquisitions.
- Medicare home health rates were reduced in 2012; CMS finalized a 3.79% reduction for 2012 and a further 1.32% for 2013. Further reimbursement, eligibility, authorized-hours, or state-budget changes could pressure revenue and margins.
- Illinois payment delays threaten working capital and could increase revolver borrowings. The filing also highlights proposed Illinois Medicaid cuts and state managed-care expansion.
- Customer and geographic concentration, contract renewals, competitive pressure, labor costs and union negotiations (about 69% of employees represented), regulatory audits, billing documentation, and credit-facility covenants are material risks.
- The Advantage acquisition earn-out remaining at year-end was approximately $0.7 million, with final payment expected in Q2 2012. In February 2012, Addus sold a Portland-area home health agency for approximately $0.5 million, with net proceeds of about $0.4 million.
- Management reported effective disclosure controls and internal control over financial reporting. The independent auditor issued an unqualified opinion on the financial statements; auditor attestation of internal controls was not required.
Investor verification priorities
- Track Illinois receivable aging, subsequent collections, prompt-payment interest receipts, and borrowing-base availability as lender add-backs expire.
- Assess whether home health operations can improve excluding impairment effects, given lower Medicare episode revenue and increased segment overhead.
- Verify the financial impact of Medicare rate reductions and any enacted state Medicaid funding, eligibility, or managed-care changes.
- Review debt maturities, covenant headroom, and the 2012 dividend-note and acquisition earn-out payments.
- Reconcile reported cash generation with the large receivables balance and increased DSO; review future impairment assumptions for remaining goodwill.