Addus Homecare Corp

NASDAQ:ADUS

Earnings Call Transcript 2018-Q1

[Operator]

Good morning, and welcome to the Addus HomeCare Corporation First Quarter 2018 Earnings Conference Call. Today's call is being recorded.

To the extent any non-GAAP financial measure is discussed in today's call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP by going to the company's website and reviewing yesterday's news release.

This conference call may also contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Addus' expected quarterly and annual financial performance for 2018 or beyond. For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statement. Without limiting the foregoing, discussions of forecast, estimates, targets, plans, beliefs, expectations and the like are intended to identify forward-looking statements. You are hereby cautioned that these statements may be affected by important factors, among others, set forth in Addus' filings with the Securities and Exchange Commission and in its first quarter news release. Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements. The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future event or otherwise.

I will now turn the call over to the company's President and Chief Executive Officer, Mr. Dirk Allison. Please go ahead, sir.

[R. Allison, executive]

Thank you, Jamie. Good morning, everyone, and thank you for joining us for our first quarter conference call. With me today is Brian Poff, our Chief Financial Officer. I will begin with some overall comments, and then Brian will discuss the first quarter results that we issued yesterday afternoon. After that, we would be happy to respond to any questions.

As we announced yesterday, our strong operating performance continued in the first quarter of 2018, which led to our solid financial results. Revenue for the first quarter was $109.4 million compared to $101.6 million for the same period in 2017, an increase of 7.7%, driven by a combination of organic growth and acquisitions. Our adjusted earnings per diluted share for the first quarter of 2018 increased to $0.42 as compared to $0.34 for the same period in 2017, an increase of 23.5%. Our adjusted EBITDA for the first quarter of 2018 increased 9.6% to $8.7 million from $8 million with an increase in our adjusted EBITDA margin to 8%. We ended the first quarter with approximately $63.4 million of cash in the bank and $43.9 million of debt.

As reflected in our cash position, our cash collections continued to be strong from all payers, including the State of Illinois. With both a tax increase and a fiscal 2018 budget, Illinois continues to do a nice job of keeping our company relatively current on our business with the state. During this month, the leadership of the state has started negotiations concerning a budget for the 2019 fiscal year. With the contingency issue of a tax increase off the table, we are optimistic that this process will lead to a budget being passed this summer, which will allow the state to pay for our services in a timely manner. As we have in the past, we will continue to stay close to the situation and to work to make sure the state leaders understand the importance of a budget to service providers like Addus. I would like to mention that with the inclusion of our last 2 acquisitions, our non-Medicaid business with the State of Illinois is down to approximately 13% of our total annualized revenue.

As we announced on April 1, we closed on our acquisition of the Arcadia Home Care & Staffing business. This transaction was very strategic as it strengthened our operations in 8 of our current states while allowing us entry into 2 new states, Florida and Wisconsin. This strengthening of operations in our current market is an important part of our acquisition strategy. The majority of our Arcadia revenue comes from personal care services, similar to our main service line at Addus. In addition, Arcadia also provides us with a division that focuses on recruitment, which is very important since recruiting future caregivers is a key component in maintaining our organic growth. Over the past month, our team has been working to ensure we have a smooth transition of Arcadia to our company. All Arcadia sites are now under the direction of our operations team. We're excited about the completion of this transaction and the continued performance of the Arcadia sites. I want to publicly welcome the Arcadia team to Addus and look forward to continued growth in this business.

In addition to Arcadia transaction, on May 1, we closed on our previously announced purchase of Ambercare, a leading provider of personal care, hospice and home health services in the state of New Mexico. As a result, we are now the largest provider of both personal care and hospice services in New Mexico. Teams from both companies have started to transition systems onto common platforms and to integrate our field operations. Ambercare brings a strong scalable home health and hospice operating platform to Addus, which we will continue to use as we grow in these 2 services. I'm excited to welcome the Ambercare team to Addus.

With the addition of home health and hospice to our company, we will begin the process converting those operations to Homecare Homebase, the leading software system for these services. We are excited about moving to this new operating platform. Our plan calls for this conversion to be completed by the end of 2018.

The Ambercare acquisition is an example of our strategy to add services to our home-based care business model, a model that enables individuals to stay in their homes while also offering services needed by our managed care partners. We will continue to look for opportunities to add services that benefit our consumers, patients and payers.

While our integration efforts on both of these acquisitions are ongoing, our team continues to evaluate other opportunities to grow Addus through acquisition and believe that we will have the opportunity to close at least one additional transaction during 2018. While we continue to focus on expanding our market share in states in which we operate, we also now have the ability to grow organically and through acquisitions in our new states of Florida and Wisconsin, both of which meet our growth criteria.

On our last earnings call, I mentioned that CMS had announced that personal care services may be added on Medicare Advantage Plans to their care offerings beginning in 2019. This is an exciting possibility for Addus and one which we are discussing with our MCO partners. As you know, we have worked to develop strong relationships with managed care providers as more states have made the decision to outsource their Medicaid programs to MCOs. While it is too early to tell what the potential impact could be for Addus, this is another positive step towards expanding the availability of our home care services in a value-based market and an indication of the increasing awareness of the value of personal care services.

Before I turn this call over to Brian for a more detailed review of the first quarter performance, let me thank all the employees of Addus. It is important for each of us to realize that we provide very important and much-needed services to our consumers and patients at a very low cost. This enables them to stay in their homes instead of progressing to much more expensive health care in a less intimate setting. The good work that Addus does 24 hours a day is made possible by all the hard work of our 31,000 employees.

With that, let me turn the call over to Brian.

[Brian Poff, executive]

Thank you, Dirk, and good morning, everyone. Addus performed well for the first quarter of 2018 as we produced strong organic growth and, through the success of our acquisition initiatives, further positioned the company for ongoing growth throughout 2018. For the quarter, we again produced strong same-store revenue growth of 4.6% compared with the first quarter of 2017. For the second consecutive quarter, our revenue also reflected additional year-over-year growth due primarily to the full quarter impact of the acquisition of Options Home Care in August 2017.

Looking forward, we continue to expect to produce same-store revenue growth in our target range of 3% to 5%, which we've met or exceeded for the last 7 quarters. In addition, we expect the Arcadia and Ambercare acquisitions, discussed by Dirk, to contribute to overall double-digit revenue growth for the company and to be accretive to our earnings throughout the remainder of 2018. Continued profitable growth from same-store revenues and accretive acquisitions, combined with a reduction in our income tax rate to an anticipated below 20% range, support our expectations for stronger earnings growth for the remainder of 2018.

Net service revenues increased 7.7% for the first quarter of 2018 to $109.4 million. Compared to the first quarter of 2017, this growth reflected an increase of 4% in billable hours per business day for the quarter and an increase of 3.6% in revenue per billable hour. I would note that the adoption of ASC 606 on January 1 affected the comparability of revenue growth and P&L items as a percentage of revenue as about 2 million of our provision for bad debt for the quarter was netted directly against revenue instead of as an operating expense, as in prior periods. This change reduced the revenue growth rate for the quarter by approximately 200 basis points. As a reminder, this reporting change has no effect on net income, adjusted EBITDA or adjusted earnings per diluted share.

Gross margin was 25.5% for the quarter compared with 26.9% for the first quarter of 2017, primarily as a result of the adoption of ASC 606. Without this impact, our gross margin percentage would have been 26.8% for the first quarter, essentially consistent with the prior year. To date, we have continued to be successful in gaining corresponding reimbursement increases to offset mandated wage increases and have maintained our margins.

G&A expense was 19.6% of revenue for the quarter compared with 18.6% for the first quarter of 2017. Included in G&A expense for the latest quarter, our M&A expenses, stock-based compensation, restructuring charges and severance and other costs totaling 216 basis points as a percentage of revenue compared to 153 basis points in the prior year. An increase of 30 basis points was related to the impact of the adoption of the accounting standards update.

The company's adjusted EBITDA increased 9.6% to $8.7 million for the first quarter of 2018 from the first quarter last year while adjusted EBITDA margin increased to 8%. Adjusted net income per diluted share increased 23.5% to $0.42 for the quarter from $0.34 for the first quarter of 2017. The adjusted per share results for the first quarter of 2018 exclude the following: prompt payment interest income from the State of Illinois of $0.16, M&A transaction expenses of $0.07, restructuring charges of $0.02, severance and other costs of $0.01 and noncash stock-based compensation of $0.06. Our adjusted per share results for the first quarter of 2017 exclude a gain on the sale of the adult day service centers of $0.11, M&A transaction expenses of $0.01, severance and other costs of $0.05 and noncash stock-based compensation of $0.02.

Let me also point out that our first quarter 2018 tax rate was 18.7%, lower than we anticipated. This was a result of the extension that federal empowerment zone tax credit that was announced in February 2018 and treated as a discrete item in the first quarter. For the remainder of 2018, we expect our tax rate to be in the low 20% range, as we have previously indicated.

Our first quarter net cash from operations totaled $14.3 million. At March 31, 2018, we had $63.4 million in cash on hand, $111.3 million of availability on our revolving credit facility and $43.9 million in term debt. After the consummation of our Arcadia and Ambercare acquisitions, our term debt had subsequently increased to $103.7 million with nothing drawn on our revolver. We're still well capitalized to continue executing on our acquisition strategy with approximately $19 million still available on our delayed draw term loan, another $100 million available for acquisitions under our accordion and approximately $55 million in cash on hand.

DSOs at year-end were 69 days compared with 73 days at the end of 2017. DSOs for the Illinois Department of Aging were 57 days at the end of the first quarter compared with 75 days at the end of 2017. As Dirk mentioned, we have continued to see consistent payments from Illinois, including $2.3 million in prompt payment interest and are pleased with their efforts to keep us as current as possible. We look forward to a budget being passed in Illinois this summer, and we will remain very focused on that process.

This concludes our prepared comments this morning. Thank you for all being with us. We now ask the operator to please open the line for your questions.

[Operator]

[Operator Instructions] Our first question is from Dana Hambly of Stephens.

[Jacob Johnson, analyst]

This is Jacob Johnson on for Dana. I guess starting out with personal care being added as a supplemental benefit for Medicare Advantage next year, are you able to size this opportunity at all? Or is it too soon? And then how are you preparing for it?

[R. Allison, executive]

Thanks, Jacob. Yes, we're not able to size the MA opportunity as it relates to personal care. It's still very early in the process. However, we are having discussions with a lot of our managed care providers about the way they look at that opportunity. So for us, we're just continuing to visit with our MAs, try to help them design a plan that could be effective. And then, of course, from our standpoint, we'd like to be involved with being able to help them with that opportunity from a service standpoint.

[Jacob Johnson, analyst]

Got it. And then Dirk, over the last couple of years, you've built a pretty impressive team there at the corporate level. Now that you're getting close to the $600 million revenue run rate target, how large of a revenue base do you think your current infrastructure can support? How much more could you scale it?

[R. Allison, executive]

Well, honestly, that's somewhat of a subjective question. I think we have a team that can take this company all the way up. My -- our -- we talked about being an $800 million to $1 billion company, and I think we have no problem with this team getting there. I do want you to understand that as we continue to grow, there may be additional resources we bring in to help us with that growth. But the base team itself, I think, is very capable of handling that.

[Jacob Johnson, analyst]

I guess following up on that, as you moved into hospice, are there investments that are required on that side of the business?

[R. Allison, executive]

Well, when we acquired Ambercare, one of the things we were excited about is that they bought a pretty strong platform as it relates to home health and hospice, one which we felt we could utilize as we continue to grow those service lines. I think the investment that we are making immediately to help with that platform is the transition from our current operating system over to the Homecare Homebase system, which we believe will give us the ability to grow and scale both home health and hospice as we see opportunities. So we are making that investment this year.

[Jacob Johnson, analyst]

And quick clarification there. The Homecare Homebase, that's just on home health hospice. You're not implementing that on the personal care side.

[R. Allison, executive]

That is correct. It will not be on the personal care side.

[Jacob Johnson, analyst]

Got it. And then last question for me. On M&A, you're fishing in some pretty competitive markets, but you've been able to land some pretty good-sized deals this year and sounds like there may be more to come. Why do you think you've been able to successful -- be successful? Do you think it's because you're leading with the personal care benefit -- personal care acquisitions? Are you just looking where others aren't? Anything to call out or maybe you don't want to give away the secret sauce?

[R. Allison, executive]

I wish I could tell you what the secret sauce is. We're not -- we haven't been looking in areas that some of our competitors are, which are the more transformational size acquisitions. We've been looking in the acquisition with revenue size, let's say, $100 million and under. And we do a pretty good job, I think, as a company of getting to know the company in which we're trying to acquire, them getting to know us, trying to make sure we have a culture fit. So other than that, just making sure that we understand the business, and they understand our culture and where we're trying to go. That is probably what I can tell you is what we believe is very important when we look at these deals.

[Operator]

[Operator Instructions] Our next question is from Mitra Ramgopal of Sidoti.

[Mitra Ramgopal, analyst]

Just wanted to follow up on the M&A side first. Clearly, you indicated you expect to complete another deal by the end of the year. Just wondering the environment you're seeing out there, is it pretty much yourself in terms of looking at targets? Or are you seeing increased competition in terms of others also coming into this space? And any color there would be helpful.

[R. Allison, executive]

Well, I would say, Mitra, that -- I don't know that we've seen increased competition as we've look at deals. I think we continue to see consistent competition. We've not -- it's rare that we're the only company out there looking at the opportunities that we see in both personal care and then as with Ambercare home care and hospice, but we haven't seen a step-up in that. And quite frankly, as far as what we've been able to pay, again, realizing we're not after some of the larger transformational deals where the pricing has gotten quite high, we've seen consistent pricing in the area in which we've looked.

[Mitra Ramgopal, analyst]

Okay, that's great. And I was wondering, in light of Ambercare or Arcadia and the increased size now of the company, are you getting increased interest from managed care in terms of partnering with you?

[R. Allison, executive]

Absolutely. I think that's one of the important things that I personally have seen over the last few months, and that is the interest of our MCO partners and our ability to add additional services into home and to add additional locations, places where they operate that they'd like to see us operate. So part of our strategy fits hand-in-hand with that. And that is we want to get stronger in the markets in which we operate, and we want to add additional service lines in those particular markets. That's why Arcadia and Ambercare, both, were very strategic for us as far as an acquisition.

[Mitra Ramgopal, analyst]

Okay, that's great. And I noticed -- just a question on the -- in terms of the revenue per billable hour, it sort of continues to tick up nicely. As you look to negotiate new contracts, et cetera, are you getting any pushback from a reimbursement standpoint?

[Brian Poff, executive]

Yes, Mitra. I think you continue to see that step-up. We've -- like we've mentioned in my script comments, we've had pretty consistent reimbursement increases to offset wage pressure. We've done a great job. I know New York is a market that we talked about toward the end of last year that was going to be an opportunity. Our team has done a great job of working with the payers up in that market to get step-up. So we continue to see success in that area.

[Mitra Ramgopal, analyst]

Okay. I remember South Shore was a drag for you. Is that pretty much behind you now?

[Brian Poff, executive]

Yes. So far from what we've seen, our team has done a great job of filling that gap for us, yes.

[Operator]

[Operator Instructions] Our next question is from Dana Hambly of Stephens.

[Jacob Johnson, analyst]

It's Jacob again. Just one last question. Dirk, you mentioned the Arcadia had a recruiting division that was a bit different than anything you had at Addus previously. Could you just give a little more color on what they're bringing to the table?

[R. Allison, executive]

Yes. When we started looking at Arcadia, most of their business, the majority of their business was in personal care, which obviously fit right with Addus. They also then had a division that did staffing. And the more we look at that, the more excited we got about the possibilities of that coming on with Addus. Because one of our challenges, if you talked with our operating team, Brad Bickham, our COO, he would tell you that one of his biggest challenges at each of our sites is the recruitment of caregivers. And so in a lot of cases, the ability to make sure that we have those people onboard to service the needs of our consumers, our patients, our payers is very, very important. And we're now seeing that this knowledge base of the staffing company that came with Arcadia who happened to operate in one of our biggest markets or one of our markets where we need help is bringing resources to bear and, we believe, will help us as we continue to try to work on this need for future caregivers. So we're very excited about that division, even though, as you mentioned Jacob, it's not something we've done in the past.

[Operator]

Our next question is from Mitra Ramgopal of Sidoti.

[Mitra Ramgopal, analyst]

Just wanted to follow up on the private pay side of the business. I know you did a couple of tuck-in acquisitions late last year and early this year. I was wondering in terms of the opportunities on that front that you're seeing.

[R. Allison, executive]

Well, we continue to be interested, Mitra, in the private pay. We did bring on a couple of those companies, as you mentioned, and we are working with those companies. It's taken, I believe, our revenue from about 2% private pay to about 3% private pay. So we're excited about that opportunity. It's not going to be a huge growth area because it's hard to grow by acquisition in that area because most of the larger providers of private pay services are franchise providers, and that's not a model that we're interested in.

[Mitra Ramgopal, analyst]

Okay. And finally, just to be clear. I know -- I believe, Dirk, you had mentioned Illinois is about 30% of revenue. Was that after you factor in Ambercare and Arcadia, just to be clear?

[R. Allison, executive]

Yes. Let me clear that up just so you understand. So we have -- everybody understands where Illinois is. If you took the entire revenue of Illinois, after you factor in Ambercare and Arcadia, it's going to be about 40%. Now in that are the private pay, which is not paid by the state. It also includes Medicaid, which is not paid by the state. It is paid, as you know, by [ matching ] federal government. So the part of the Medicaid that is still through the state is required to be paid by a lawsuit. So that is not a risk in cash flow. The part that's been picked up by MCOs, the MCOs have done a very nice job of keeping us current in their part of the business. So what that leaves is what we call the non-Medicaid business or the general revenue fund business, and that equates, after Ambercare and Arcadia, to about 13% of our overall revenue. I hope that clears it up.

[Operator]

And that does conclude our Q&A session for today. I'd like to turn the call back over to Mr. Dirk Allison for any further remarks.

[R. Allison, executive]

Thank you, operator. I'd like to thank everybody for your interest in Addus and for your participation in our earnings call today. Hope you have a great week.

[Operator]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program, and you may all disconnect. Everyone, have a great day.