Leaders at Addus HomeCare (NASDAQ: ADUS) are focused on wide-ranging initiatives, including cutting operational costs and improving the performance of recent acquisitions, following a bad miss on third quarter 2015 financial results. However, the C-suite remains confident that the company’s overall strategy is sound, given the direction that the health care system is taking big-picture.
“We are disappointed with our performance in the Q,” CEO Mark Heaney said Tuesday on a call with analysts. “We have some work to do, and we have initiatives in place to improve our near-term performance.”
The disappointment stemmed from much lower than expected revenue, which came in at $84.3 million—well under analysts’ expectations of $87.3 million. Adjusted earnings per share was $0.25, compared to $0.29 a year earlier.
These results were previewed by the company in a pre-release issued Oct. 22. But with the full earnings released on Monday and in the call with analysts Tuesday morning, Heaney and his colleagues delved further into what caused the miss and what actions are being taken in response.
The revenue shortfall was due mainly to the performance of two recently acquired businesses, in Tennessee and Ohio. They are not doing poorly, Heaney emphasized, but they also did not achieve the sales that Addus expected.
“While we may have missed our forecast, these are good acquisitions, these are good businesses, they are purchased at modest prices, they are in good state, and they are profitable,” he said. “We are bringing the necessary focus to these locations so that they generate the growth they are capable of achieving.”
Furthermore, Addus has not been dissuaded from pursuing other acquisitions in accordance with its strategy, he said, adding that capital and human resources both are available to drive growth.
Still, the performance of the recent acquisitions raised some questions among analysts, including Dana Hambly of Stephens. She pointed out the company is in the process of closing its $18 million acquisition of New York South Shore, which operates home health care business in several New York counties. She asked about the integration approach with Addus’ existing portfolio.
To help ensure a smooth integration, leaders will initially try to “get our hands around their operations,” said COO Maxine Hochhauser. Addus does not intend to immediately change any of the South Shore infrastructure.
In terms of its broader acquisition strategy, Addus is seeking strong alignment with Medicaid managed care payors, believing that this is how personal in-home care primarily will be financed in the future, particularly for low-income clients who are dually eligible for Medicare and Medicaid. The company is going after growth in states that are transitioning to a managed care model for in-home services.
But that’s also proven to be a sticking point, at least in the short-term. Some states are not transitioning over to managed care quickly or efficiently, and in the mean time, Addus’ referral rates are slowing.
Although he acknowledged these headwinds, Heaney shows no doubts about Addus’ strategy. He reiterated his belief in the approach at the recent National Association for Home Care & Hospice (NAHC) annual conference in Nashville, and again on Tuesday’s earnings call.
“The public policy is that we are going to serve this [dual-eligible] population at home to the greatest extent possible,” he said. “Managed care will increasingly serve this population and they will give preference to larger, more sophisticated, technology oriented, outcomes driven, and ultimately risk taking organizations. We think we are the leader among that small group of providers. We are very positive about our opportunity in this growing and changing market.”
Shares were down nearly 11% as of mid-afternoon on Tuesday, and it remains an open question how the stock will perform going forward from the rough third quarter, but investors have seemed to be on board with Heaney’s message. Addus’ share price was up 28% year-to-date and 7.5% from two years prior as of Oct. 1, according to an index from Stoneridge Partners.
Written by Tim Mullaney