Addus(ADUS) - 2022 Q4 - Annual Report

Part I Business Addus HomeCare provides in-home services across personal care, hospice, and home health, serving 66,000 consumers in 22 states - As of December 31, 2022, the company provided services in 22 states through approximately 202 offices, serving around 66,000 consumers[12] Financial Highlights by Segment (2022 vs 2021) | Metric | 2022 (in thousands) | 2021 (in thousands) | | :--- | :--- | :--- | | Net Service Revenue | | | | Personal care | $706,507 | $685,854 | | Hospice | $201,772 | $152,253 | | Home health | $42,841 | $26,392 | | Total Net Service Revenue | $951,120 | $864,499 | | Net Income | $46,025 | $45,126 | | Total Assets | $937,994 | $947,585 | Overview Addus provides home care services across three segments, primarily to 'dual eligible' consumers, reducing healthcare costs - The company operates three segments: personal care, hospice, and home health, with consumers being predominantly 'dual eligible' for Medicare and Medicaid[12] - The company's model is designed to lower healthcare costs by providing care in the home, which can delay or eliminate the need for more expensive institutional care and facilitate early intervention[14] Our Market and Opportunity The company operates in a growing, fragmented home and community-based services market, driven by aging population and consolidation - Demand for Home and Community-Based Services (HCBS) is expected to grow due to the aging U.S. population and the preference for home-based care as an alternative to institutional care[17] - The home-based services industry is highly fragmented, and the company expects ongoing consolidation driven by payor desire to narrow provider networks and increasing regulatory and operational complexity[18] Our Growth Strategy Addus's growth strategy focuses on quality care, organic expansion, managed care marketing, and strategic acquisitions - The company's growth strategy includes driving organic growth, marketing to managed care organizations, and growing through acquisitions[25][26][27] - In 2022, the company completed two acquisitions: JourneyCare Inc. and Apple Home Healthcare, LTD, which contributed $48.7 million in net service revenues for the year[27] Our Services The company offers personal care (non-medical), hospice (palliative), and home health (skilled medical) services - Personal Care: Provides non-medical assistance with activities of daily living (e.g., bathing, grooming, meal preparation)[30] - Hospice: Provides palliative nursing care, social work, and spiritual counseling for terminally ill patients with a life expectancy of six months or less[31] - Home Health: Provides skilled medical services such as nursing, physical, occupational, and speech therapy, typically on a short-term basis[32] Human Capital As of December 31, 2022, Addus employed 33,182 people, with 51.4% represented by labor unions Employee Breakdown (as of Dec 31, 2022) | Category | Full-time | Part-time | Total | | :--- | :--- | :--- | :--- | | Caregivers and agency staff | 5,835 | 26,892 | 32,727 | | Corporate support centers | 449 | 6 | 455 | | Total | 6,284 | 26,898 | 33,182 | - Approximately 51.4% of the company's total employees are represented by labor unions, primarily the Service Employees International Union (SEIU)[56] Government Regulation Addus operates in a heavily regulated industry, subject to extensive federal and state healthcare laws and audits - The business is subject to extensive regulation, and failure to comply can result in penalties, loss of licenses, and exclusion from federal or state programs[67] - Key fraud and abuse laws applicable to the company include the federal Anti-Kickback Statute, the Stark Law, and the False Claims Act (FCA)[77][78] - The company is subject to payment integrity audits from third-party contractors like Recovery Audit Contractors (RACs) and Unified Program Integrity Contractors (UPICs) to detect and correct improper payments[81] - Compliance with the Health Insurance Portability and Accountability Act (HIPAA) is required, which regulates the use, disclosure, and security of protected health information[84] Risk Factors The company faces significant risks including macroeconomic pressures, government payor dependence, labor shortages, and cybersecurity - Macroeconomic conditions, including inflation and higher interest rates, have increased operating and financing costs, which may continue to have an unfavorable impact on financial results[91] - A significant portion of revenue comes from government programs (Medicare and Medicaid), making the company vulnerable to reimbursement reductions or changes in these programs[108] - The company has significant revenue concentration in a few states, particularly Illinois, which accounted for 20.7% of revenue in 2022 from the Illinois Department on Aging[101] - The business is exposed to cybersecurity risks, and a security breach could lead to loss of confidential data, remediation expenses, litigation, and reputational damage[126] - The company faces risks related to attracting and retaining qualified personnel, especially caregivers, due to a tight labor market, which could increase labor costs and hinder service delivery[127] Properties The company leases all its administrative offices and two main support centers in Illinois and Texas, with portions subleased - The company leases all its properties, including support centers in Frisco, TX (106,000 sq. ft.) and Downers Grove, IL (59,000 sq. ft.)[134] Legal Proceedings The company is involved in various legal proceedings, including a $6.5 million Medicare repayment request with indemnification rights - The company is involved in a legal proceeding regarding a $6.5 million Request for Repayment from a Medicare contractor related to its Ambercare subsidiary. The company is appealing and has a contractual right to full indemnification from the seller of Ambercare[428] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Addus common stock trades on Nasdaq, and the company retains earnings for growth, with no plans for future dividends - Common stock is listed on The Nasdaq Global Market under the symbol 'ADUS'[138] - The company has never paid dividends and does not plan to, retaining earnings for growth. The credit facility also restricts dividend payments[140] Management's Discussion and Analysis of Financial Condition and Results of Operations Net service revenues grew 10.0% to $951.1 million in 2022, driven by acquisitions and organic growth, improving gross profit and liquidity Consolidated Financial Summary (2022 vs 2021) | Metric | 2022 (in thousands) | 2021 (in thousands) | % Change | | :--- | :--- | :--- | :--- | | Net service revenues | $951,120 | $864,499 | 10.0% | | Gross profit | $299,739 | $269,848 | 11.1% | | Operating income | $68,737 | $65,936 | 4.2% | | Net income | $46,025 | $45,126 | 2.0% | - Managed care revenues accounted for 36.0% of total revenue in 2022, down from 37.2% in 2021[143] - Adjusted EBITDA increased to $101.5 million in 2022 from $97.7 million in 2021[144][211] Results of Operations Net service revenues increased 10.0% in 2022 to $951.1 million, driven by hospice and home health growth, improving gross profit margin - Net service revenue increased by 10.0% in 2022, driven by growth across all three segments: personal care (+3.0%), hospice (+32.5%), and home health (+62.3%)[180][188][195] - Gross profit as a percentage of revenue increased to 31.5% in 2022 from 31.2% in 2021, mainly due to the full-year effect of higher-margin hospice acquisitions[181] - General and administrative expenses increased by $27.5 million, primarily due to a $18.0 million increase in administrative employee costs from acquisitions[182] Liquidity and Capital Resources The company's liquidity is strong, with $80.0 million cash, $237.2 million credit facility availability, and improved DSO Cash Flow Summary (in thousands) | Cash Flow Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $105,110 | $39,488 | | Net cash used in investing activities | ($106,590) | ($42,015) | | Net cash (used in) provided by financing activities | ($87,454) | $26,344 | - At Dec 31, 2022, the company had $80.0 million in cash and $237.2 million available for borrowing under its credit facility[212][213] - Days Sales Outstanding (DSO) improved to 45 days at the end of 2022, compared to 54 days at the end of 2021[233] Critical Accounting Policies and Estimates Key accounting policies involve significant estimates for revenue recognition and annual impairment testing of goodwill and intangible assets - Revenue recognition requires estimating implicit price concessions based on historical collection experience, which involves complex and subjective judgments[237][238] - Goodwill and intangible assets are tested for impairment annually as of October 1. The quantitative test uses discounted cash flow and market multiple approaches, which rely on estimates of future cash flows and profitability[241][242] - For the fiscal year 2022 impairment tests, the fair value of the reporting units exceeded their carrying values by at least 100% for personal care, 75% for home health, and 67% for hospice[243] Quantitative and Qualitative Disclosures about Market Risk The company's primary market risk is interest rate fluctuations on variable-rate debt, with a 1% increase impacting 2022 net income by $1.6 million - The company's primary market risk is interest rate risk on its $134.9 million of variable-rate debt[253] - A 100 basis point increase in interest rates would have reduced 2022 net income by an estimated $1.6 million[253] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements and the independent auditor's report from PricewaterhouseCoopers LLP Report of Independent Registered Public Accounting Firm PricewaterhouseCoopers LLP issued an unqualified opinion on financial statements and internal controls, identifying accounts receivable valuation as a critical audit matter - The auditor, PricewaterhouseCoopers LLP, issued an unqualified opinion on both the financial statements and the effectiveness of internal control over financial reporting[289] - The valuation of accounts receivable, net of allowances for implicit price concessions, was identified as a Critical Audit Matter[297][298] Consolidated Financial Statements The consolidated financial statements show total assets of $938.0 million, total liabilities of $304.5 million, and net income of $46.0 million for 2022 Consolidated Balance Sheet Highlights (As of Dec 31, 2022) | Account | Amount (in thousands) | | :--- | :--- | | Total current assets | $222,807 | | Goodwill | $582,837 | | Total assets | $937,994 | | Total current liabilities | $131,146 | | Long-term debt, net | $131,772 | | Total liabilities | $304,454 | | Total stockholders' equity | $633,540 | Consolidated Income Statement Highlights (Year Ended Dec 31, 2022) | Account | Amount (in thousands) | | :--- | :--- | | Net service revenues | $951,120 | | Gross profit | $299,739 | | Operating income | $68,737 | | Net income | $46,025 | | Diluted EPS | $2.84 | Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of December 31, 2022 - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 2022[256] - Management concluded that internal control over financial reporting was effective as of December 31, 2022, based on the COSO framework. This assessment excluded the 2022 acquisitions of JourneyCare and Apple Home[257][259] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the 2023 Proxy Statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2023 Proxy Statement[264] Executive Compensation Information regarding executive compensation is incorporated by reference from the company's 2023 Proxy Statement - Information regarding executive compensation is incorporated by reference from the 2023 Proxy Statement[266] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership is incorporated by reference from the company's 2023 Proxy Statement - Information regarding security ownership is incorporated by reference from the 2023 Proxy Statement[268] Certain Relationships and Related Transactions, and Director Independence Information regarding related transactions and director independence is incorporated by reference from the company's 2023 Proxy Statement - Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the 2023 Proxy Statement[269] Principal Accounting Fees and Services Information regarding principal accounting fees and services is incorporated by reference from the company's 2023 Proxy Statement - Information regarding principal accounting fees and services is incorporated by reference from the 2023 Proxy Statement[270] Part IV Exhibits and Financial Statement Schedules This section lists the financial statements and all exhibits filed with the Form 10-K, including certifications - This section contains the index to financial statements and a list of all exhibits filed with the report[271][272] Form 10-K Summary No Form 10-K summary is provided in this report - No Form 10-K summary is provided[283]