Addus Hits Its Stride, Considers New Service Lines

After a restructuring year, Addus HomeCare (Nasdaq: ADUS) delivered strong financial results for the fourth quarter of 2016, and its leadership believes that some key strategic objectives now are within reach. And as the company hits its stride, it could expand into the home health and hospice arenas, according to CEO Dirk Allison.

The Downers Grove, Illinois-based personal care company posted fourth quarter revenue of $103.56 million, which was a 23.1% year-over-year increase and beat analyst expectations by $0.66 million. Its fourth quarter earnings per share of $0.43 beat expectations by $0.07.

The large revenue increase was due in large part to the acquisition of Long Island-based South Shore Home Health Services, completed in Feb. 2016, Addus noted in a press release. However, same-store revenues also contributed, as they increased 5.1% on a year-over-year basis.

In addition to completing the South Shore acquisition, Addus ushered in new executive leadership last year. Early in the year, Allison became the new CEO. Brian Poff was hired as CFO in May 2016, and W. Bradley Bickham came on board as executive vice president and COO in Jan. 2017.

“I feel our executive team now is complete,” Allison said Tuesday on an earnings call with analysts. “…I’m excited about our management team and believe we are well-positioned to meet our strategic goals.”

Among these goals is an annual adjusted EBITDA margin of 9%. With the fourth quarter earnings, Addus hit 7.2% for income from continuing operations and 9% for adjusted EBITDA. This gives Allison “confidence” that the company’s current revenue volume can support the ongoing 9% EBITDA goal.

Home Health, Hospice on the Horizon?

A 10% adjusted EBITDA margin is an eventual target, but this would require increasing the company’s revenue base by about $150 million, Allison said.

“So that’s going to be a while down the road,” he said.

In terms of acquisitions that might drive that growth, the company has implemented a “more detailed due diligence process” for potential transactions, and this has meant several deals did not work out over the past several months, Allison said.

However, the pipeline remains “active” and new acquisitions could be announced in the next few months, he added.

Addus mainly targets smaller companies with revenue in the $20 million to $25 million range, according to Allison. These providers have tended to have price expectations that are too high for Addus to justify, he said.

However, Addus is casting a wide net, looking at some larger transactions as well as acquisitions that would bring in new service lines—specifically home health and hospice.

“We don’t necessarily want to enter into those service lines in markets where we wouldn’t have personal care service, but … we [typically] spend over 21 months with our consumers in their home before they need [home health] or hospice or other services,” Allison said. “And if we’ve done our job and built that relationship with them, we feel that gives us an opportunity as they turn and need additional home care services.”

This would be a version of a play made by some other large home health companies in recent months, including Baton Rouge, Louisiana-based Amedisys (Nasdaq: AMED). A major provider of Medicare-reimbursed home health services, AMED entered the personal care space with an acquisition in Massachusetts in 2016.

Addus is not interested at this time in partnerships as a way to bring in new service lines, Allison said.

Illinois Headaches Continue

An ongoing budget stalemate in Illinois—Addus’ largest market—has not been resolved by the November 2016 elections. This means that many organizations that rely on payments from state programs, including Addus, have experienced substantial disruption in these revenue streams.

The state has paid some money owed to Addus, including $68 million in past due receivables in the third quarter of 2016 and $2.8 million of interest in the fourth quarter.

“[This] supports our belief that the State of Illinois will pay for contracted services,” Allison said.

The state’s prolonged transition to Medicaid managed care also has hit Addus; this transition the main reason that bad debt increased from 1.8% of revenue in the third quarter to 2.2% in the fourth quarter, CFO Brian Poff said on Tuesday’s call.

The bad debt will remain at an elevated level until the state’s transition to managed care is materially complete, Poff added. The operations side of Addus’ business is working to quickly identify and address problems related to this issue.

Illinois Gov. Bruce Rauner (R) recently floated a revamped managed care model for the state, which would, among other things, reduce the number of Medicaid managed care organizations (MCOs) administering benefits.

“Nothing happens quickly in the state of Illinois due to the fact that there’s different viewpoints on each side,” Allison said. “Now, I do understand Rauner can do some things as related to MCOs and Medicaid, and if [he does], do we feel that’s good. One, we have a good relationships with MCOs and we are proud of that, but we will continue to keep our cost as low as possible, so that if the governor is looking for ways [to lower costs] with Medicaid, we think we are the answer.”

Addus also is on track to move payroll over to a new ADP system for the majority of the company by July 1, 2017, executives said on the earnings call. This was another major initiative begun in 2016, and it is expected to result is reduced costs due to less “rework,” Allison said.

ADUS shares were up nearly 3% to $34.45 as of late afternoon Tuesday.

Written by Tim Mullaney

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