Addus HomeCare Corporation (ADUS) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to your Quarter 4 2012 Addus HomeCare Corporation's Earnings Conference Call, hosted by Dennis Meulemans, CFO for Addus HomeCare Corporation. My name is Bupenda. I'll be your event manager today. [Operator Instructions] I'd like to advise all parties that this conference is being recorded for replay purposes. And now I would like to hand the conference over to Dennis. Please go ahead, sir.

Thank you, operator, and good morning. This is Dennis Meulemans, and thank you for joining us. Before we begin, I'll briefly state the Safe Harbor statement. This presentation will contain forward-looking statements within the meaning of the federal securities laws. Statements regarding future events and developments, the company's future performance, as well as management's expectations, beliefs, intentions, plans, estimates or projections relating to the future are forward-looking statements within the meaning of these laws. These forward-looking statements are subject to a number of risks and uncertainties including factors outlined from time to time in our most recent Form 10-K or Form 10-Q, our earnings announcements and other reports we file with the Securities and Exchange Commission. These are available at www.sec.gov. The company undertakes no obligation to update publicly any forward-looking statement whether as a result of new information, future events or otherwise. With that complete, I'd like to turn the call over to Mark Heaney, our CEO.

Thank you. Good morning and thank you, all, for joining us on Addus HomeCare's 2012 fourth quarter investor call. I'm joined here in our Support Center by Dennis Meulemans, whom you just heard, our CFO; and Darby Anderson, Vice President for Home & Community Services. I characterize our performance in the fourth quarter as I characterize our overall performance in 2012, as positive, strong and from a strategic perspective, critically important. Our consolidated revenues for the quarter increased by 9.4% to $63.8 million. Net income from continuing operations was $3.5 million, an increase of 20%. These results represent a solid beginning for our new company with a single focus on growing our core business while we at the same time work to expand our relationship with managed care, who are increasingly assuming responsibility for our at-risk populations. After announcing our decision to enter into a strategic evaluation of our Home Health division at the end of the third quarter, we not only completed our evaluation but ultimately sold the division on good terms in a forthright manner to one of the top home health companies in the country, LHC Group. Our home health professionals have landed with one of the best. That was important to us. We retained an equity interest in important markets for both us and LHC. And we look forward to exploring avenues, markets or opportunities where we might work cooperatively to provide patients with a best-in-class personal care, home health and hospice continuum of collaborative structure we think payors will increasingly favor as health care reform evolves. With the sale of the Home Health business combined with our steady improvement over the year in growing our core Home & Community business, as well as our improved cash management, we have de-levered the company to an unprecedented level. In the quarter and over the year, our core service, our core competency, Home & Community services performed solidly. Revenues in census were steady up. Our efforts at becoming a sales organization are taking root. We're not done. Our operating costs were controlled or reduced. We've made steady progress with our centralization efforts, wherein we are reducing site staffing and operating costs through the increased use of technology. Technology not only intended to make us more efficient, but more importantly to make us more effective in the delivery of outcome-oriented personal care services, linking our caregivers and their at-risk consumers to the health system, resulting in a consistent, predictable, early identification and early intervention system, that being our highest pure objective. Over the year, I believe our team has effectively operated the business for growth and earnings while at the same time evaluating, making decisions and executing on strategies which we believe have positioned us for what we think will be a very exciting and rewarding future as the industry transitions to managed care. Now at this time, I'd like to turn the call over to Darby Anderson, who is going to talk to us a little bit about our Home & Community operations in the quarter. Then Dennis will give us more comments on our financial performance. But at the conclusion, Dennis, I'd like you to turn it back to me because I'd like to come back with some closing comments, addressing where we think the world is headed and how we think we can go on. Darby?

Thank you, Mark. I'm also pleased to report a strong quarter with year-over-year revenue growth of 9.4%, census growth of 5% and units of service growth of 9.2%. Our operating costs, when measured as a percentage of revenues, are down from a year ago. Overall, I am pleased with our results for the quarter and our consistent growth. Census in unit growth remains our primary focus. While Mark talked to us about our positioning the company for increased managed care penetration, and that is where the new and greatest opportunity is, it is important to keep in mind most of our business remains in the traditional state-run unit of service model. My team remains focused on and expected to grow the traditional business. I'm very confident in our team of leaders, their ability to drive census growth, control our costs while preparing for managed care. As Mark mentioned, we have closed the transaction with LHC on our Home Health business. I think our team did a great job moving that transaction along quickly. Completing the transition, my team will turn attention to exploring markets and services, where we might work cooperatively to serve a shared population. Our centralization and electronic visit verification projects continue to make progress. Today, approximately 69% of our Home Care Aides are using some form of electronic visit verification or EVV. And our centralized contact center continues to build out. The conversion to this new care system in advance of the managed care initiatives is very exciting and rewarding for all members of our team, our direct care providers, supervisors, management and our vendor partners. In closing, I want to comment on 2 items that some of you may have seen covered in the media. One is an article on the Chicago Tribune online about the Illinois Department on Aging running out of appropriation before the end of the current fiscal year. Let me be clear. Aging has run out of appropriation before the end of the state fiscal year for at least the past 3 years. Frankly, despite increasing its budget every year, this occurs because the state is serving more and more elderly at home rather than in nursing homes. A supplemental appropriations bill has been drafted by house and senate democrats and the governor's office. We understand this bill will be introduced very soon. Illinois is currently and generally paying Addus consistently. Despite the message conveyed in the article, we anticipate payments to continue. In our 34 years, the State of Illinois has paid every dollar of every invoice we have ever submitted for authorized services. The second item is a recent Notice of Proposed Rulemaking to Amend the Companionship and Live-In Worker Regulations under the Fair Labor Standards Act or FLSA. Addus does not and has not relied on the companionship exemption in our provision of care. We believe the new draft rule will have no impact on our business or business practices. If anything, it forces our competitors to practice more consistent with how we pay our employees and operate our business. I'll now hand it over to Dennis for a closer look at the numbers.

Thank you, Darby, and good morning. Given our recent sale of substantially all of the assets from our Home Health business, our financial results are presented with the Home Health business treated as discontinued operations. Accordingly, the results of operations for this business are reflected as a single line item on our income statement with revenues less related expenses reflected net of appropriate tax expense. We will not be discussing the results of this business on this call. Our continuing operations include the businesses previously referred to as our Home & Community segment plus the results of operations for 3 agencies that were retained by Addus in large part because their business was consistent with our Home & Community business. Highlights for our fourth quarter were consolidated revenues for the quarter increased by 9.4% to $63.8 million compared to the $58.3 million for the same period in 2011. Net income was $3.7 million or $0.35 per diluted share, an increase of 50% when compared to reported net income of $2.5 million or $0.23 per diluted share for 2011. Net income from continuing operations was $3.5 million or $0.33 per diluted share, an increase of 20% when compared to 2011 results of $2.9 million or $0.27 per diluted share. Net income from discontinued operations for the quarter was a positive $242,000, reflecting a substantial improvement from the reported loss of $418,000 recorded in 2011. As we have stated in our press release, our quarterly comparables are influenced by a variety of one-time events and factors. Our fourth quarter results from continuing operations through 2012 were positively affected by Workers Opportunity Tax Credits realized in the quarter, which substantially reduced our income tax expense. Our fourth quarter 2011 results from continuing operations included 2 extraordinary items: the reevaluation of contingent consideration and the receipt of a prompt payment interest from the State of Illinois. Lastly, our income tax expense was negatively affected in 2011 by the goodwill impairment charge taken in 2011 on our Home Health business. Given these facts, on a pro forma basis, our earnings from continuing operations were $0.30 per diluted share in 2012, after normalizing for the effective tax rate to 34.1%. This represents a 36.4% improvement over earnings from continuing operations in the fourth quarter of 2011, which were 22% per diluted share, after excluding the effect of the reevaluation of contingent consideration related to the acquisition of CarePro and the prompt payment interest received from the state and after normalizing the annual effective tax rate to 33%. Cash flow from operations during the quarter was $6.1 million, of which $6 million was provided by operations before considering working capital needs. Our year-to-date cash flow from operations was a positive $15.9 million. Interest expense was $358,000 or 0.6% of revenues in the fourth quarter of 2012, a decline of $237,000 when compared to 2011, reflecting our continued strategy to reduce our outstanding debt. Our fixed notes were substantially eliminated during the quarter, leaving only our bank revolver as our outstanding loan balance. Our core Home & Community business reported an increase in net service revenues of $5.5 million or 9.4% to the $63.8 million when measured on a year-over-year basis. This growth was fueled by a 5% increase in average census, combined with a 9.2% increase in billable hours, reflecting our continued efforts to improve the level of services provided to our clients. We would point out that the average billable hours per census per month increased in the fourth quarter, a trend we anticipate may decline in 2013 as states continue to look for ways to control their costs. Our gross profit margin for the quarter declined over the prior year by 140 basis points to 27.5% in the fourth quarter, driven largely by unfavorable workers' compensation claim experienced in the quarter when compared to a very favorable experience in this area in 2011. On an annual basis, our gross profit margin declined by 50 basis points, largely due to a combination of increased unemployment tax rates, driven by state changes in regulatory rates, and the unfavorable variance in workers' compensation expense. Our general and administrative expenses were down $293,000 on a year-over-year basis to $11.7 million, substantially attributable to the improved -- positive improvements in our bad debt expense. We have attributed approximately $240,000 in corporate G&A to the Home Health business in the quarter. This compares to approximately $346,000 of expense incurred in 2011. These expenses are included in discontinued operations. We anticipate these cost reductions will become permanent with the eventual wind down of the business. Now let's turn to our balance sheet and cash flow statements. Our accounts receivable, net of reserves, were $71.3 million as of December 31, 2012, representing a $100,000 reduction from the balance reported at the end of last quarter, but approximately $1.1 million decline from the December 31, 2011 balances. Our payments from the State of Illinois remain stable relative to the increased business we have with them with noted improvements in collections from our other payors. At December 31, we had total debt of $16.5 million compared to $22.4 million as of September 30, as positive operating cash flow was used to reduce our debt levels. With the sale of the Home Health business at the end of February, we have paid off all debt but remained -- but retained availability under our bank line of credit. Cash provided from operations was $6.1 million for the quarter, with $5.9 million used to reduce our debt and $100,000 used for investments in fixed assets. Adjusted EBITDA was $6.3 million for the fourth quarter of 2012, an increase of 45% from the $4.4 million in 2011. This does include the expenses related to our discontinued operations. This concludes my comments. I would like to turn the discussion back to Mark for closing remarks and for any questions.

Thank you, Dennis. So before we open up for questions, I would like to make a few comments on where I think -- where we -- the company goes from here. We're very good and proven in our delivery of Home & Community services. The services we provide are Medicaid-, state- and federally funded services delivered historically in a social model, sometimes intentionally separated from the health system. These programs are intended to help keep at-risk persons at home, where they want to be and out of more expensive hospitals and nursing homes. But they are not consistently effective and are not designed to provide measurable health outcomes. Worse, many of these consumers are -- also receive Medicare-funded Home Health services. These are the dual eligible. And our services and the Medicare-funded Home Health services are not coordinated, leading to duplication and inefficiency. In both cases, government is the payor. And governments are stressed and they're not going to pay more. And at the same time, demand of the aging as we age is increasing. We are positioning our company consistent with our view that increasingly and ultimately, managed care will be our payor through the duals or LTSS projects underway in a number of states across the country and planned in many of ours. Managed care is taking over the responsibility for the comprehensive care, the wellness, the home-based care, the acute care and the nursing home costs for this at-risk population, the consumers we have served for the past 34 years. Shifting care responsibility for this at-risk, high-cost population aligns the economic incentive with the health interests of the consumer. This, for the first time in those 34 years of service, perfectly captures the potential of the personal care services we provide to link our aides to the larger health system so that need can be identified early, qualified professionally and intervened upon with appropriate urgency. It is early in this transition. But we think health care is moving back to community nursing model, where you knock on doors and ask the at-risk persons how they're doing. We are positioned, our team is focused and we're ready. And frankly, our folks are stoked. We appreciate the support of our investors. We appreciate our vendor partners, our payors, our referral sources. We especially appreciate the consumers who trust us with their care. And frankly and most importantly, we appreciate the 14,000 health care employees who make the difference in so many lives every day. Now with that, I'd like to turn the call back to the operator to open it up for questions from our listeners. Thank you.

[Operator Instructions] Our first question comes from the line of Matthew Gillmor from Robert Baird. Matthew D. Gillmor - Robert W. Baird & Co. Incorporated, Research Division: I was just curious, could you provide a little bit of commentary on the growth in the census has been particularly strong and has seen some acceleration year-to-date? And then the growth in billable hours has actually been above the census level. So I was just hoping you could talk about the acceleration that's happened because of the sales force investments, and then also why the billable hours have been trending above the census levels? And I guess Dennis sort of commented that maybe that sort of declined towards the census growth. Was that a right sort of interpretation?

Matt, this is Darby. Good question. With regard to the increase in the census growth, this is just us applying our model, our sales program, getting out community outreach. Our agency directors are out more frequently. I think we've refined and focused our sales efforts over time, and I think we are seeing the benefit of that. In terms of the units of service, I think Dennis' point was we're -- our clients receive an authorization and it's our job to see that those hours are delivered. We have a lot of tools in place from our IT department and just generally focus on the scheduling. But we are able to deliver a higher authorized number of hours as we move forward. So I think that's the increase in the rate of the hours.

And Matt, I would just add, we can't be blind to the fact that the states are looking for ways to manage their cost structure. So I specifically would point out that you should look at the longer-term trend here and not take this 1-quarter experience and extrapolate it. Matthew D. Gillmor - Robert W. Baird & Co. Incorporated, Research Division: Okay, that's very helpful. And then just could either Mark or Darby sort of comment on where the discussions are with some of the managed care payors on the dual opportunity and maybe remind us for which states are potentially rolling into managed care over the next sort of 12 months?

Matt, this is Mark. As we all know, from the Healthcare Reform comes the duals initiative. And I think there are upwards of 26 states that are in some form of planning or movement of this population to managed care. Many of our states are involved. I can do a list but it would be many of them. But they are in their various stages of either planning or execution. Let me focus on the 4 that are most urgent for us. California has a very ambitious managed care effort underway. It plans to -- their current plan is to begin in September. New Mexico has been in managed care for upwards of 3 years and we're a provider there. Illinois is moving -- we estimate 40% of our caseload in managed care. They moved the date. The new date is Jan 1. And New Jersey has been in a managed care move for over a year and we're a provider there. We are talking to -- those are the big efforts underway. We are talking to every plan. And we have not had a single meeting that didn't lead to second, third and fourth meetings. I would characterize the plan's response to our model as enthusiastic. One of the things that I think is important for us to think about is managed care is not constrained in the same way as states are in the -- with whom they contract. And the managed care companies are -- they don't have any experience on the Home & Community side, and so they -- but they do recognize that if they're going to manage risk on probably a limited PMPM, they've got to do everything they can to keep the pulse on the most at-risk -- their most at-risk members at home, keeping them out of ambulances. And so we've spoken to the plans. And the plans tell us they are going to only contract with those providers who drive outcomes and can provide technology. And there are hundreds of providers in Illinois. Long term, we do not see plans doing business with hundreds of providers. So we do not -- we think that ultimately, we won't be doing business with states in 3, 4, 5 years. It'll all be -- this population will be moved to managed care. Matthew D. Gillmor - Robert W. Baird & Co. Incorporated, Research Division: Okay. Just 1 or 2 other quick questions. The press release mentions an increase in the unemployment taxes for '13. Dennis, is there any way for you to size up what the increase is and how we should think about that going forward?

Matt, we don't disclose that level. I will say that the tax rates in the state have -- last year, they went up about 75% statutorily. And this year, we're seeing another 50% increase. They tend to extend -- the states all vary. They tend to extend the number of -- or the salary dollars that those tax rates apply to. And there is a profile of -- or I should say each state has something. We'll consider whether we want to disclose some of that fact base in our K but I can't give you a lot more than that at this point. Matthew D. Gillmor - Robert W. Baird & Co. Incorporated, Research Division: Okay. I understand. And I guess the last question is around that topic. I assume -- I know you don't give guidance, but I assume just sort of -- as we think about the earnings progression, it should -- it looks sort of similar to how it's looked the last couple of years, which is the first quarter is the lowest and then it sort of stair steps up and the fourth quarter is generally the strongest.

That timing related -- and it is all deals with all of these payroll tax items. That timing differential, Matt, we anticipate will be consistent with what you've seen in the past.

We have no further questions in the queue. [Operator Instructions] Yes, we do have a question now. It's from the line of Matthew Gillmor from Robert Baird. Matthew D. Gillmor - Robert W. Baird & Co. Incorporated, Research Division: I had one more, actually. But it was sort of a use of cash question, which looking back 2 years ago doesn't -- I'm surprised we're kind of at this point. But I guess you're going to get -- you've gotten $20 million from the sale of the Home Health operations. You paid off $16 million. What are sort of the priorities as you move forward? I assume it would be mostly focused on potential M&A opportunities. But are there any sort of significant CapEx investments you need to make as you prepare for the dual opportunities or sort of any commentary on where you see your cash going?

Okay, Matt, good question. And yes, probably our first priority is going to be able pay our taxes on that gain, which are not insignificant. But we are looking at all of our needs. We're not, as you know, a real capital-intensive organization, as far as CapEx. But M&As are -- M&A opportunities are out there. We are continuing to look at those and certainly other opportunities for our capital as we look at expanding our centralization and those efforts. So -- but we're still in the evaluation stage with respect to that. We'll try to find a good place to make those investments.

We have no further questions in the queue.

Thank you, operator. And thank you, all, so much for your support and thank you for listening in today. We look forward to talking to you 90 days hence. Thank you so much.