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Nov. 2, 2021, 4:04 p.m. EDT

10-Q: ADDUS HOMECARE CORP

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(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion together with our unaudited condensed consolidated financial statements and the related notes included elsewhere in this quarterly report on Form 10-Q. This discussion contains forward-looking statements about our business and operations. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include words like "believes," "belief," "expects," "plans," "anticipates," "intends," "projects," "estimates," "may," "might," "would," "should" and similar expressions are intended to be forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. These statements are based on the beliefs and assumptions of our management based on information currently available to management. Such forward-looking statements are subject to risks, uncertainties and other important factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, the future impact to our business with respect to developments related to the COVID-19 pandemic, including, without limitation, the impact of government regulation and stimulus measures, including the Coronavirus Aid, Relief, and Economic Security Act ("CARES Act"), Paycheck Protection Program and Health Care Enhancement Act ("PPPHCE Act"), the Consolidated Appropriations Act, 2021 ("CAA"), the COVID-Related Tax Relief Act of 2020, the American Rescue Plan of 2021 ("ARPA") and other stimulus legislation, as well as the six-point COVID-19 plan announced by the current Presidential administration, along with the related uncertainties regarding the implementation of such stimulus measures and any future stimulus measures related to COVID-19; increased expenses related to personal protective equipment ("PPE"), labor, supply chain, or other expenditures; workforce disruptions and supply shortages and disruptions; changes in operational and reimbursement processes and payment structures at the state or federal levels; changes in Medicaid, Medicare, other government program and managed care organizations policies and payment rates; changes in, or our failure to comply with, existing, federal and state laws or regulations, or our failure to comply with new government laws or regulations on a timely basis; competition in the healthcare industry; the geographical concentration of our operations; changes in the case mix of consumers and payment methodologies; operational changes resulting from the assumption by managed care organizations of responsibility for managing and paying for our services to consumers; the nature and success of future financial and/or delivery system reforms; changes in estimates and judgments associated with critical accounting policies; our ability to maintain or establish new referral sources; our ability to renew significant agreements or groups of agreements; our ability to attract and retain qualified personnel; federal, city and state minimum wage pressure, including any failure of Illinois or any other governmental entity to enact a minimum wage offset and/or the timing of any such enactment; changes in payments and covered services due to the overall economic conditions, including economic and business conditions resulting from the COVID-19 pandemic, and deficit spending by federal and state governments; cost containment initiatives undertaken by state and other third-party payors; our ability to access financing through the capital and credit markets; our ability to meet debt service requirements and comply with covenants in debt agreements; business disruptions due to natural disasters, acts of terrorism, pandemics, riots, civil insurrection or social unrest, looting, protests, strikes or street demonstrations; our ability to integrate and manage our information systems; our ability to prevent cyber-attacks or security breaches to protect our computer systems and confidential consumer data; our expectations regarding the size and growth of the market for our services; the acceptance of privatized social services; our expectations regarding changes in reimbursement rates; eligibility standards and limits on services imposed by state governmental agencies; the potential for litigation; discretionary determinations by government officials; our ability to successfully implement our business model to grow our business; our ability to continue identifying, pursuing, consummating and integrating acquisition opportunities and expand into new geographic markets; the impact of acquisitions and dispositions on our business, including the potential inability to realize the benefits of the acquisition of Queen City Hospice, LLC and its affiliate Miracle City Hospice, LLC (together "Queen City Hospice"); the potential impact of the discontinuation or modification of LIBOR; the effectiveness, quality and cost of our services; our ability to successfully execute our growth strategy; changes in tax rates, including, without limitation, increases in the corporate tax rate; the impact of public health emergencies; the impact of inclement weather or natural disasters; and various other matters, many of which are beyond our control. In addition, these forward-looking statements are subject to the risk factors set forth in Part I, Item 1A of our Annual Report on Form 10-K for the period ended December 31, 2020, filed with the SEC on March 1, 2021. You should carefully review all of these factors. Moreover, our business may be materially adversely affected by factors that are not currently known to us, by factors that we currently consider immaterial or by factors that are not specific to us, such as general economic conditions. These forward-looking statements were based on information, plans and estimates at the date of this report, and we assume no obligation to update any forward-looking statements to reflect changes in underlying assumptions or factors, new information, future events or other changes, except as may be required by law.

Overview

We are a home care services provider operating in three segments: personal care, hospice and home health. Our services are principally provided in-home under agreements with federal, state and local government agencies, managed care organizations, commercial insurers and private individuals. Our consumers are predominantly "dual eligible," meaning they are eligible to receive both Medicare and Medicaid benefits. Managed care revenues accounted for 36.7% and 38.0% of our net service revenues during the three months ended September 30, 2021 and 2020, respectively, and 37.3% and 38.5% of our net service revenues during the nine months ended September 30, 2021 and 2020, respectively.

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A summary of our financial results for the three and nine months ended September 30, 2021 and 2020 is provided in the table below.







                                  For the Three Months             For the Nine Months
                                   Ended September 30,             Ended September 30,
                                   2021            2020            2021            2020
                                 (Amounts in Thousands)          (Amounts in Thousands)
        Net service revenues   $     216,662     $ 193,987     $     639,857     $ 568,779
        Net income             $      11,577     $   9,119     $      32,068     $  24,684
        


As of September 30, 2021, we provided our services in 22 states through 207 offices. For the nine months ended September 30, 2021 and 2020, we served approximately 64,000 and 59,000 discrete individuals, respectively. Our personal care segment also includes staffing services, with clients including assisted living facilities, nursing homes and hospice facilities.

COVID-19 Pandemic Update

COVID-19, the disease caused by a novel coronavirus, continues to be widespread throughout the United States and other parts of the world. Governments and public health officials continue to recommend and mandate certain precautions to mitigate the spread of the virus. The number of cases of COVID-19 decreased in the United States as vaccines became widely available, and a significant number of restrictions related to the COVID-19 pandemic in the United States have been eliminated or relaxed as the result of such decrease. In connection with the decrease in the number of COVID-19 cases and the change of restrictions in the United States, economic conditions in the United States have significantly improved during 2021. However, during the third quarter of 2021, the number of COVID-19 case and deaths increased in the United States due in part to the emergence of a new variant of the novel coronavirus that causes COVID-19, as well as low vaccination rates in many parts of the country. In response, various governmental authorities and private businesses in the United States continued to implement, or reinstituted, certain mitigation strategies, such as masking and vaccine requirements. The rate of new cases and deaths in the United States are currently decreasing again but longer-term trends are unknown.

In September 2021, President Biden announced a six-point plan for responding to the COVID-19 pandemic. Part of this plan provides that the Occupational Safety and Health Administration ("OSHA") will develop a rule which will require all employers with 100 or more employees to require their workforce to be fully vaccinated against COVID-19 (or, alternatively, to provide a negative COVID-19 test result on a weekly basis). The employer mandate has not yet gone into effect and further details, including any proposed OSHA rules, have not been released. Some states have also imposed or have plans to impose vaccine mandates, particularly in healthcare settings. In addition, CMS is expected to issue an emergency regulation requiring COVID-19 vaccination of staff within all Medicare and Medicaid-certified facilities. CMS has indicated that compliance with the vaccine mandate will be a condition of participation in the Medicare and Medicaid programs. The exact scope and other details of the OSHA and CMS mandates are not yet known, but we expect that these rules will impact our home health and hospice segments.

We are monitoring developments related to these plans as information becomes available to assess how these plans, including any national or state vaccine mandates, may impact our workforce in personal care, home health, hospice and our corporate support centers. While the Company has not mandated vaccines for our employees, we have developed a multistep program in order to strongly encourage our employees to get the COVID-19 vaccine, which includes offering a vaccine stipend and prizes as well as creating educational and motivational leadership communication. We are actively engaged in an effort to track vaccination rates among caregivers and to continue to improve those rates. However, it is difficult to predict the future impact of the pandemic or the six-point COVID-19 plan and state vaccine mandates on economic conditions in the United States and our business at this time.

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For the three and nine months ended September 30, 2021, COVID-19-related expenses in our personal care segment were approximately $1.3 million and $14.6 million, respectively, which were offset by $0.4 million and $11.7 million, respectively, related to the utilization of a portion of the funds received from the Provider Relief Fund in November 2020 and are included in cost of service revenues on the Condensed Consolidated Statements of Income. As of September 30, 2021, the Company deferred the recognition of the remaining Provider Relief Fund of approximately $0.5 million, which will be recognized as we incur specific expenses related to the pandemic, or we anticipate will be returned, to the extent COVID-19-related expenses are not incurred, by December 31, 2021. Additionally, we recognized revenue of $1.3 million and $6.1 million attributable to temporary rate increases from certain payors in our personal care segment for the three and nine months ended September 30, 2021, respectively.

For the nine months ended September 30, 2021, COVID-19-related expenses in our hospice segment were approximately $1.9 million, which were offset by $1.9 million, related to the utilization of a portion of the funds received from the Queen City Hospice Provider Relief Fund and included in cost of service revenues on the Condensed Consolidated Statements of Income.

As of September 30, 2021, the Company deferred the recognition of $6.7 million of payments received from payors for COVID-19 reimbursement, included within accrued expenses, which will be recognized as we incur specific expenses related to the pandemic, such as expenses related to acquiring additional PPE, or will be returned to the extent COVID-19-related expenses are not incurred. We are not able to reasonably predict the total costs we will incur related to the COVID-19 pandemic, and such costs could be substantial.

As the labor market continues to be tight and unemployment has declined in comparison to earlier levels, the competition for new caregivers has increased, which will continue to impact our ability to attract and retain new caregivers. In addition, the competition for skilled healthcare staff has increased significantly, which continues to impact our ability to attract and retain qualified skilled healthcare staff. To the extent that we continue to have lower unemployment levels in the United States and shortages of caregivers and skilled healthcare staff, it may continue to hinder our ability to attract and retain sufficient caregivers and skilled healthcare staff to meet the continuing demand for both our non-clinical and clinical services. The increased staffing challenges may also result in increased labor cost to satisfy our staffing requirements.

Federal and state agencies continue to issue regulations and guidance related to the COVID-19 pandemic, and the public health situation continues to evolve, and, therefore, we cannot currently predict with certainty the extent to which our business, results of operations, financial condition or liquidity will ultimately be impacted. We will continue to assess the impact and consequences of COVID-19 and government responses to the pandemic, including the enactment and implementation of the CARES Act, the PPPHCE Act, the CAA, the ARPA and other stimulus legislation, as well as the implementation of the President's six-point COVID-19 plan and any federal and state vaccine mandates, on our business, results of operations, financial condition and cash flows. Given the dynamic nature of these circumstances, the related financial effect cannot be reasonably estimated at this time but is not expected to materially adversely impact our business. See Part I, Item 1A-"Risk Factors - The COVID-19 pandemic could negatively affect our operations, business and financial condition, and our liquidity could also be negatively impacted, particularly if the U.S. economy remains unstable for a significant amount of time" of our Annual Report on Form 10-K for the period ended December 31, 2020, filed with the SEC on March 1, 2021.

See "Liquidity and Capital Resources" below for additional information regarding funds received related to COVID-19 relief.

Acquisitions

In addition to our organic growth, we have grown through acquisitions that have expanded our presence in current markets, with the goal of having all three levels of home care in additional markets, or facilitating our entry into new markets where in-home care has been moving to managed care organizations.

On July 1, 2020, we completed the acquisition of A Plus Health Care, Inc. ("A Plus") for approximately $14.5 million, including the amount of excess cash held by A Plus at the closing of the acquisition (approximately $2.8 million), with funding provided by available cash. With the purchase of A Plus, we expanded our personal care services in the state of Montana.

On November 1, 2020, we completed the acquisition of County Homemakers, Inc. ("County Homemakers") for approximately $15.8 million, including the amount of acquired excess cash held by County Homemakers at the closing of the acquisition (approximately $1.1 million), with funding provided by available cash. With the purchase of County Homemakers, we expanded our personal care services in the state of Pennsylvania.

On December 4, 2020, we completed the acquisition of Queen City Hospice for approximately $194.8 million, including the amount of acquired excess cash held by Queen City Hospice at the closing of the acquisition (approximately $15.4 million). With the purchase of Queen City Hospice, we expanded our hospice services in the state of Ohio. Additionally, on December 1, 2020, we completed the acquisition of SunLife Home Care ("SunLife") for approximately $1.7 million. With the purchase of SunLife, we expanded our personal care services in the state of Arizona. We funded these acquisitions through a combination of our revolving credit facility and available cash.

On August 1, 2021, we completed the acquisition of Armada Skilled Homecare of New Mexico LLC, Armada Hospice of New Mexico LLC and Armada Hospice of Santa Fe LLC (collectively, "Armada") for approximately $29.8 million, including the amount of acquired excess

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cash held by Armada at the closing of the acquisition (approximately $0.7 million), with funding provided by our revolving credit facility. With the purchase of Armada, we expanded our home health and hospice services in the state of New Mexico.

On October 1, 2021, we completed the acquisition of Summit Home Health, LLC ("Summit") for approximately $8.1 million, with funding provided by available cash. With the purchase of Summit, we added clinical services to our home health segment in Illinois.

Revenue by Payor and Significant States

Our payor clients are principally federal, state and local governmental agencies and managed care organizations. The federal, state and local programs under which the agencies operate are subject to legislative, budgetary and other risks that can influence reimbursement rates. We are experiencing a transition of business from government payors to managed care organizations, which we believe aligns with our emphasis on coordinated care and the reduction of the need for acute care.

For the three and nine months ended September 30, 2021 and 2020, our revenue by payor and significant states by segment were as follows:







                                                                                                                        Personal Care
                                                                For the Three Months Ended September 30,                                              For the Nine Months Ended September 30,
                                                             2021                                        2020                                      2021                                       2020
                                                                         % of                                      % of                                        % of                                     % of
                                                                        Segment                                   Segment                                     Segment                                  Segment
                                                 Amount               Net Service              Amount           Net Service             Amount              Net Service             Amount           Net Service
                                             (in Thousands)            Revenues            (in Thousands)        Revenues           (in Thousands)           Revenues           (in Thousands)        Revenues
        State, local and other
          government programs               $          83,821                  49.5   %   $         85,344              51.5   %   $         253,052                49.5   %   $        242,751              50.3   %
        Managed care organizations                     76,890                  45.3                 71,700              43.2                 231,211                45.3                213,087              44.1
        Private pay                                     4,934                   2.9                  5,193               3.1                  14,883                 2.9                 15,449               3.2
        Commercial insurance                            2,459                   1.4                  2,498               1.5                   7,481                 1.5                  7,468               1.5
        Other                                           1,505                   0.9                  1,181               0.7                   4,117                 0.8                  4,094               0.9
        Total personal care segment net
          service revenues                  $         169,609                 100.0   %   $        165,916             100.0   %   $         510,744               100.0   %   $        482,849             100.0   %
        Illinois                            $          81,959                  48.3   %   $         74,448              44.9   %   $         240,131                47.0   %   $        215,047              44.6   %
        New York                                       24,127                  14.2                 28,381              17.1                  77,237                15.1                 87,463              18.1
        New Mexico                                     24,214                  14.3                 21,878              13.2                  73,291                14.3                 64,402              13.3
        All other states                               39,309                  23.2                 41,209              24.8                 120,085                23.6                115,937              24.0
        Total personal care segment net
          service revenues                  $         169,609                 100.0   %   $        165,916             100.0   %   $         510,744               100.0   %   $        482,849             100.0   %
                                                                                                                         Hospice
                                                              For the Three Months Ended September 30,                                             For the Nine Months Ended September 30,
                                                            2021                                      2020                                      2021                                      2020
                                                                        % of                                    % of                                        % of                                    % of
                                                                      Segment                                  Segment                                     Segment                                 Segment
                                                 Amount             Net Service             Amount           Net Service             Amount              Net Service            Amount           Net Service
                                             (in Thousands)           Revenues          (in Thousands)        Revenues           (in Thousands)           Revenues          (in Thousands)        Revenues
        Medicare                            $         36,278                 92.8   %   $        22,404              93.4   %   $         104,715                93.4   %   $        68,372              92.8   %
        Managed care organizations                     1,514                  3.9                 1,130               4.7                   4,396                 3.9                 3,710               5.0
        Other                                          1,303                  3.3                   452               1.9                   2,987                 2.7                 1,641               2.2
        Total hospice segment net
          service revenues                  $         39,095                100.0   %   $        23,986             100.0   %   $         112,098               100.0   %   $        73,723             100.0   %
        Ohio                                $         15,868                 40.6   %   $             -                 -   %   $          44,676                39.8   %   $             -                 -   %
        New Mexico                                     9,268                 23.7                10,979              45.8                  27,216                24.3                33,431              45.3
        All other states                              13,959                 35.7                13,007              54.2                  40,206                35.9                40,292              54.7
        Total hospice segment net
          service revenues                  $         39,095                100.0   %   $        23,986             100.0   %   $         112,098               100.0   %   $        73,723             100.0   %
        


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With the acquisition of Queen City Hospice, the Company expanded our hospice services in the state of Ohio.







                                                                                                                         Home Health
                                                                For the Three Months Ended September 30,                                              For the Nine Months Ended September 30,
                                                             2021                                        2020                                       2021                                      2020
                                                                         % of                                      % of                                        % of                                     % of
                                                                       Segment                                    Segment                                     Segment                                  Segment
                                                 Amount              Net Service               Amount           Net Service             Amount              Net Service             Amount           Net Service
                                             (in Thousands)            Revenues            (in Thousands)        Revenues           (in Thousands)           Revenues           (in Thousands)        Revenues
        Medicare                            $           6,372                 80.1    %   $          3,188              78.0   %   $         13,699                  80.5   %   $         9,667              79.2   %
        Managed care organizations                      1,218                 15.3                     829              20.3                  2,838                  16.7                 2,325              19.0
        Other                                             368                  4.6                      68               1.7                    478                   2.8                   215               1.8
        Total home health segment
          net service revenues              $           7,958                100.0    %   $          4,085             100.0   %   $         17,015                 100.0   %   $        12,207             100.0   %
        New Mexico                          $           7,958                100.0    %   $          4,085             100.0   %   $         17,015                 100.0   %   $        12,207             100.0   %
        Total home health segment
          net service revenues              $           7,958                100.0    %   $          4,085             100.0   %   $         17,015                 100.0   %   $        12,207             100.0   %
        


We derive a significant amount of our net service revenues in Illinois, which . . .

Nov 02, 2021

COMTEX_396243596/2041/2021-11-02T16:04:10

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