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Addus HomeCare (ADUS)

Filed: 6 Nov 17, 7:00pm
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM10-Q

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2017

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

Commission file number001-34504

 

 

ADDUS HOMECARE CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

Delaware 20-5340172

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

6801 Gaylord Parkway, Suite 110

Frisco, TX

 75034
(Address of principal executive offices) (Zip code)

469-535-8200

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of RegulationS-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐.

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule12b-2 of the Exchange Act.

 

Large accelerated filer   Accelerated filer 
Non-accelerated filer ☐ (Do not check if a smaller reporting company)  Smaller reporting company 

Emerging growth company  ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule12b-2 of the Exchange Act).    Yes  ☐    No  ☒.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Stock $0.001 par value

Shares outstanding at October 31, 2017: 11,631,659

 

 

 


Table of Contents

ADDUS HOMECARE CORPORATION

FORM10-Q

INDEX

 

PART I. FINANCIAL INFORMATION

   3 

Item 1. Financial Statements

   3 

Condensed Consolidated Balance Sheets as of September 30, 2017 (Unaudited) and December 31, 2016

   3 

Condensed Consolidated Statements of Income (Unaudited) For the Three and Nine Months Ended September  30, 2017 and 2016

   4 

Condensed Consolidated Statement of Stockholders’ Equity (Unaudited) For the Nine Months Ended September 30, 2017

   5 

Condensed Consolidated Statements of Cash Flows (Unaudited) For the Nine Months Ended September  30, 2017 and 2016

   6 

Notes to Condensed Consolidated Financial Statements (Unaudited)

   7 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

   19 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

   28 

Item 4. Controls and Procedures

   28 

PART II. OTHER INFORMATION

   29 

Item 1. Legal Proceedings

   29 

Item 1A. Risk Factors

   29 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

   29 

Item 3. Defaults Upon Senior Securities

   29 

Item 4. Mine Safety Disclosures

   29 

Item 5. Other Information

   29 

Item 6. Exhibits

   30 

 

2


Table of Contents

PART I – FINANCIAL INFORMATION

 

Item 1.Financial Statements

ADDUS HOMECARE CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

As of September 30, 2017 and December 31, 2016

(Amounts and Shares in Thousands, Except Per Share Data)

 

   (Unaudited)   (Audited) 
   September 30,
2017
   December 31,
2016
 

Assets

    

Current assets

    

Cash

  $45,688   $8,013 

Accounts receivable, net of allowances of $10,361 and $7,363 at September 30, 2017 and December 31, 2016, respectively

   96,335    116,999 

Prepaid expenses and other current assets

   6,267    5,998 
  

 

 

   

 

 

 

Total current assets

   148,290    131,010 
  

 

 

   

 

 

 

Property and equipment, net of accumulated depreciation and amortization

   7,494    6,648 

Other assets

    

Goodwill

   91,821    73,906 

Intangibles, net of accumulated amortization

   16,243    15,413 

Deferred tax assets, net

   3,153    3,153 

Investments in joint ventures

   900    900 
  

 

 

   

 

 

 

Total other assets

   112,117    93,372 
  

 

 

   

 

 

 

Total assets

  $267,901   $231,030 
  

 

 

   

 

 

 

Liabilities and stockholders’ equity

    

Current liabilities

    

Accounts payable

  $4,910   $4,486 

Current portion of long-term debt, net of debt issuance costs

   3,407    2,531 

Accrued expenses

   46,942    42,603 
  

 

 

   

 

 

 

Total current liabilities

   55,259    49,620 
  

 

 

   

 

 

 

Long-term liabilities

    

Long-term debt, less current portion, net of debt issuance costs

   40,372    22,482 
  

 

 

   

 

 

 

Total liabilities

  $95,631   $72,102 
  

 

 

   

 

 

 

Stockholders’ equity

    

Common stock—$.001 par value; 40,000 authorized and 11,634 and 11,527 shares issued and outstanding as of September 30, 2017 and December 31, 2016, respectively

  $12   $12 

Additionalpaid-in capital

   95,229    92,253 

Retained earnings

   77,029    66,663 
  

 

 

   

 

 

 

Total stockholders’ equity

   172,270    158,928 
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $267,901   $231,030 
  

 

 

   

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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Table of Contents

ADDUS HOMECARE CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

For the Three and Nine Months Ended September 30, 2017 and 2016

(Amounts and Shares in Thousands, Except Per Share Data)

(Unaudited)

 

   For the Three Months Ended
September 30,
  For the Nine Months Ended
September 30,
 
   2017  2016  2017  2016 

Net service revenues

  $108,592  $103,502  $313,758  $297,032 

Cost of service revenues

   79,539   76,079   228,877   219,594 
  

 

 

  

 

 

  

 

 

  

 

 

 

Gross margin

   29,053   27,423   84,881   77,438 

General and administrative expenses

   19,359   21,299   57,239   59,864 

Gain on sale of adult day services centers

   —     —     (2,065  —   

Depreciation and amortization

   1,781   1,721   4,811   4,943 

Provision for doubtful accounts

   2,106   1,908   6,208   5,089 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total operating expenses

   23,246   24,928   66,193   69,896 
  

 

 

  

 

 

  

 

 

  

 

 

 

Operating income

   5,807   2,495   18,688   7,542 
  

 

 

  

 

 

  

 

 

  

 

 

 

Interest income

   (30  (16  (50  (46

Interest expense

   870   648   3,629   1,760 
  

 

 

  

 

 

  

 

 

  

 

 

 

Total interest expense, net

   840   632   3,579   1,714 

Other income

   64   126   165   126 
  

 

 

  

 

 

  

 

 

  

 

 

 

Income before income taxes

   5,031   1,989   15,274   5,954 

Income tax expense

   1,623   290   4,908   1,498 
  

 

 

  

 

 

  

 

 

  

 

 

 

Net income

  $3,408  $1,699  $10,366  $4,456 
  

 

 

  

 

 

  

 

 

  

 

 

 

Net income per common share

     

Basic income per share

  $0.30  $0.15  $0.90  $0.40 

Diluted income per share

  $0.29  $0.15  $0.89  $0.40 

Weighted average number of common shares and potential common shares outstanding:

     

Basic

   11,486   11,367   11,464   11,190 

Diluted

   11,631   11,417   11,616   11,227 

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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Table of Contents

ADDUS HOMECARE CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

For the Nine Months Ended September 30, 2017

(Amounts and Shares in Thousands)

(Unaudited)

 

          Additional       Total 
   Common Stock   Paid-in   Retained   Stockholders’ 
   Shares  Amount   Capital   Earnings   Equity 

Balance at December 31, 2016

   11,527  $12   $92,253   $66,663   $158,928 
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Issuance of shares of common stock under restricted stock award agreements

   90   —      —      —      —   

Forfeiture of shares of common stock under restricted stock award agreements

   (11  —      —      —      —   

Stock-based compensation

   —     —      1,818    —      1,818 

Shares issued for exercise of stock options

   28   —      1,158    —      1,158 

Net income

   —     —      —      10,366    10,366 
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Balance at September 30, 2017

   11,634  $12   $95,229   $77,029   $172,270 
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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ADDUS HOMECARE CORPORATION

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

For the Nine Months Ended September 30, 2017 and 2016

(Amounts in Thousands)

(Unaudited)

 

   For the Nine Months Ended September 30, 
   2017  2016 

Cash flows from operating activities:

   

Net income

  $10,366  $4,456 

Adjustments to reconcile net income to net cash provided by operating activities:

   

Depreciation and amortization

   4,811   4,943 

Non-cash restructuring

   383   2,554 

Stock-based compensation

   1,818   1,263 

Amortization andwrite-off of debt issuance costs under the terminated credit facility

   1,484   261 

Amortization of debt issuance costs under the new credit facility

   235   —   

Provision for doubtful accounts

   6,208   5,089 

Gain on sale of adult day services centers

   (2,065  —   

Changes in operating assets and liabilities, net of acquisitions:

   

Accounts receivable

   15,451   5,540 

Prepaid expenses and other current assets

   (281  1,136 

Accounts payable

   418   (577

Accrued expenses

   3,750   6,326 
  

 

 

  

 

 

 

Net cash provided by operating activities

   42,578   30,991 
  

 

 

  

 

 

 

Cash flows from investing activities:

   

Proceeds from the sale of adult day services centers

   2,400   —   

Acquisitions of businesses, net of cash acquired

   (22,419  (20,449

Purchases of property and equipment

   (3,089  (1,168
  

 

 

  

 

 

 

Net cash used in investing activities

   (23,108  (21,617
  

 

 

  

 

 

 

Cash flows from financing activities:

   

Cash received from exercise of stock options

   1,158   3,016 

Borrowings on revolver—new credit facility

   30,000   —   

Borrowings on term loan—new credit facility

   45,000   —   

Borrowings on revolver—terminated credit facility

   20,000   27,000 

Borrowings on term loan—terminated credit facility

   —     25,000 

Payments on revolver—new credit facility

   (30,000  —   

Payments on revolver—terminated credit facility

   (20,000  (27,000

Payments on term loan—terminated credit facility

   (24,063  (625

Payments for debt issuance costs under the new credit facility

   (2,823  —   

Payments for debt issuance costs under the terminated credit facility

   —     (495

Payments on capital lease obligations

   (1,067  (828

Payments on contingentearn-out obligation

   —     (100
  

 

 

  

 

 

 

Net cash provided by financing activities

   18,205   25,968 
  

 

 

  

 

 

 

Net change in cash

   37,675   35,342 

Cash, at beginning of period

   8,013   4,104 
  

 

 

  

 

 

 

Cash, at end of period

  $45,688  $39,446 
  

 

 

  

 

 

 

Supplemental disclosures of cash flow information:

   

Cash paid for interest

  $1,538  $1,748 

Cash paid for income taxes

   5,357   3,236 

Supplemental disclosures ofnon-cash investing and financing activities:

   

Tax benefit related to the amortization of tax goodwill in excess of book basis

   —     120 

See accompanying Notes to Condensed Consolidated Financial Statements (Unaudited)

 

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Table of Contents

ADDUS HOMECARE CORPORATION

AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1. Summary of Significant Accounting Policies

Basis of Presentation and Description of Business

The condensed consolidated financial statements include the accounts of Addus HomeCare Corporation (“Holdings”) and its subsidiaries (together with Holdings, the “Company,” “we,” “us,” or “our”). The Company operates as one reportable business segment and is a provider of comprehensive personal care services, which are provided principally in the home. The Company’s personal care services provide assistance with activities of daily living. The Company’s consumers are primarily persons who are at risk of hospitalization or institutionalization, such as the elderly, chronically ill and disabled. The Company’s payor clients include federal, state and local governmental agencies, managed care organizations, commercial insurers and private individuals. As of September 30, 2017, the Company provided personal care services to approximately 35,000 consumers through 114 locations across 24 states.

Principles of Consolidation

All intercompany balances and transactions have been eliminated in consolidation.

As of September 30, 2017, the Company used the cost method to account for its investments in joint ventures in which it owned 10% equity interests. The Company subsequently sold such investments on October 1, 2017 (see Note 12).

Revenue Recognition

The Company generates net service revenues by providing services directly to consumers. The Company receives payments for providing services from federal, state and local governmental agencies, managed care organizations, commercial insurers and private consumers. The Company’s operations are principally provided based on authorized hours, determined by the relevant agency, at an hourly rate specified in agreements or fixed by legislation and recognized as revenues at the time services are rendered. Personal care service revenues are reimbursed by state, local and other governmental programs which are partially funded by Medicaid or Medicaid waiver programs, with the remainder reimbursed through insurance programs and private pay.

Allowance for Doubtful Accounts

The Company establishes its allowance for doubtful accounts to the extent it is probable that a portion or all of a particular account will not be collected. The Company establishes its provision for doubtful accounts primarily by analyzing historical trends and the aging of receivables. In its evaluation, the Company considers other factors including: delays in payment trends in individual states due to budget or funding issues; billing conversions related to acquisitions or internal systems; resubmission of bills with required documentation and disputes with specific payors. An allowance for doubtful accounts is maintained at a level that the Company’s management believes is sufficient to cover potential losses. However, actual collections could differ from the Company’s estimates.

Property and Equipment

Property and equipment are recorded at cost and depreciated over the estimated useful lives of the related assets by use of the straight-line method. Maintenance and repairs are charged to expense as incurred. The estimated useful lives of the property and equipment are as follows:

 

Computer equipment   3 – 5 years 
Furniture and equipment   5 – 7 years 
Transportation equipment   5 years 
Computer software   5 – 10 years 
Leasehold improvements   

Lesser of useful life or lease term, unless

probability of lease renewal is likely

 

 

 

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Goodwill

The Company’s carrying value of goodwill is the excess of the purchase price over the fair value of the net assets acquired from various acquisitions including the acquisition of Addus HealthCare, Inc. (“Addus HealthCare”). In accordance with Accounting Standards Codification (“ASC”) Topic 350, “Goodwill and Other Intangible Assets,” goodwill and intangible assets with indefinite useful lives are not amortized. The Company tests goodwill for impairment at the reporting unit level on an annual basis, as of October 1, or whenever potential impairment triggers occur, such as a significant change in business climate or regulatory changes that would indicate that an impairment may have occurred. The Company may use a qualitative test, known as “Step 0,” or atwo-step quantitative method to determine whether impairment has occurred. In Step 0, the Company can elect to perform an optional qualitative analysis and based on the results skip thetwo-step analysis. In 2016 and 2015, the Company elected to implement Step 0 and was not required to conduct the remainingtwo-step analysis. The results of the Company’s Step 0 assessments indicated that it was more likely than not that the fair value of its reporting unit exceeded its carrying value and therefore the Company concluded that there were no impairments for the year ended December 31, 2016. No impairment charges were recorded for the three and nine months ended September 30, 2017 or 2016.

Intangible Assets

The Company’s identifiable intangible assets consist of customer and referral relationships, trade names, trademarks, state licenses andnon-compete agreements. Amortization is computed using straight-line and accelerated methods based upon the estimated useful lives of the respective assets, which range from two to twenty-five years.

Intangible assets with finite lives are amortized using the estimated economic benefit method over the useful life and assessed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company would recognize an impairment loss when the estimated futurenon-discounted cash flows associated with the intangible asset is less than the carrying value. An impairment charge would then be recorded for the excess of the carrying value over the fair value. The Company estimates the fair value of these intangible assets using the income approach. No impairment charge was recorded for the three and nine months ended September 30, 2017 or 2016.

The income approach, which the Company uses to estimate the fair value of its intangible assets (other than goodwill), is dependent on a number of factors including estimates of future market growth and trends, forecasted revenue and costs, expected periods over which the assets will be utilized, appropriate discount rates and other variables. The Company bases its fair value estimates on assumptions the Company believes to be reasonable but which are unpredictable and inherently uncertain. Actual future results may differ from those estimates.

The Company also has indefinite-lived intangible assets that are not subject to amortization expense such as certificates of need and licenses to conduct specific operations within geographic markets. The Company’s management has concluded that certificates of need and licenses have indefinite lives, as management has determined that there are no legal, regulatory, contractual, economic or other factors that would limit the useful life of these intangible assets, and the Company intends to renew and operate the certificates of need and licenses indefinitely. The certificates of need and licenses are tested annually for impairment, or whenever potential impairment triggers occur. No impairment was recorded for the three and nine months ended September 30, 2017 or 2016.

 

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Debt Issuance Costs

The Company amortizes debt issuance costs on a straight-line method over the term of the related debt. This method approximates the effective interest method. The Company has classified the debt issuance costs as current portion of long-term debt or long-term debt, less current portion as of September 30, 2017 and December 31, 2016.

Workers’ Compensation Program

The Company’s workers’ compensation insurance program has a $0.4 million deductible component. The Company recognizes its obligations associated with this program in the period the claim is incurred. The cost of both the claims reported and claims incurred but not reported, up to the deductible, have been accrued based on historical claims experience, industry statistics and an actuarial analysis performed by an independent third party. The Company monitors its claims quarterly and adjusts its reserves accordingly. These costs are recorded primarily as the cost of services on the Unaudited Condensed Consolidated Statements of Income. As of September 30, 2017 and December 31, 2016, the Company recorded $0.6 million and $0.7 million, respectively, in workers’ compensation insurance recovery receivables and a corresponding increase in workers’ compensation liability. The workers’ compensation insurance recovery receivable is included in the Company’s prepaid expenses and other current assets on the Unaudited Condensed Consolidated Balance Sheets.

Interest Income

Illinois law entitles designated service program providers to receive a prompt payment interest penalty based on qualifying services approved for payment that remain unpaid after a designated period of time. As the amount and timing of the receipt of these payments are not certain, the interest income is recognized when received and reported in the statement of income as interest income. For the three and nine months ended September 30, 2017 and 2016, the Company did not receive any prompt payment interest. While the Company may be owed additional prompt payment interest, the amount and timing of receipt of such payments remain uncertain, and the Company has determined that it will continue to recognize prompt payment interest income when received.

Interest Expense

The Company’s interest expense consists of interest and unused credit line fees on its credit facilities, interest on its capital lease obligations, and amortization andwrite-off of debt issuance costs, which is reported in the statement of income when incurred.

Other Income

Other income consisted of income distributions received from investments in joint ventures. The Company accounted for this income in accordance with ASC Topic 325, “Investments—Other.”The Company recognized the net accumulated earnings only to the extent distributed by the joint ventures on the date received. The Company subsequently sold these equity investments on October 1, 2017 (see Note 12).

Income Tax Expense

The Company accounts for income taxes under the provisions of ASC Topic 740, “Income Taxes.” The objective of accounting for income taxes is to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in its financial statements or tax returns. Deferred taxes, resulting from differences between the financial and tax basis of the Company’s assets and liabilities, are also adjusted for changes in tax rates and tax laws when changes are enacted. ASC Topic 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. ASC Topic 740 also prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. In addition, ASC Topic 740 provides guidance on derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions.

In March 2016, the FASB issued Accounting Standards Update (“ASU”)2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” ASU2016-09 allows for simplification of several aspects of the accounting for share-based payment transactions including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. Under ASU2016-09, all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit in the income statement. ASU2016-09 also requires recognition of excess tax benefits regardless of whether the benefit reduces taxes payable in the current period. ASU2016-09 further permits the withholding of an amount up to employees’ maximum individual tax rate in the relevant jurisdiction without resulting in a liability classification. ASU2016-09 also requires any excess tax benefits be classified along with other income tax cash flows as an operating activity and cash paid by an employer when directly withholding shares fortax-withholding purposes to be classified as a financing activity. The Company adopted this standard on January 1, 2017 on a prospective basis. As a result, for the three and nine months ended September 30, 2017, the Company recorded an excess tax benefit of $0 and $118,000 within income tax expense on its Unaudited Condensed Consolidated Statements of Income.

Stock-based Compensation

The Company currently has two active stock incentive plans, the 2009 Stock Incentive Plan, as amended and restated (the “2009 Plan”) and the 2017 Omnibus Incentive Plan (the “2017 Plan”, and together with the 2009 Plan, the “Plans”), that provide for stock-based employee compensation. The Company accounts for stock-based compensation in accordance with ASC Topic 718, “Stock Compensation.” Compensation expense is recognized on a straight-line basis under the Plans over the vesting period of the equity awards based on the grant date fair value of the options and restricted stock awards. From October 28, 2009 to December 31, 2016, the Company utilized the Enhanced Hull-White Trinomial Model to value the Company’s options. Beginning January 1, 2017, the Company began utilizing the Black-Scholes Option Pricing Model to value the Company’s options, as the Company believes it is a more widely accepted and understood valuation model. The determination of the fair value of stock-based payments utilizing the Black-Scholes Model and the Enhanced Hull-White Trinomial Model is affected by the Company’s stock price and a number of assumptions, including expected volatility, risk-free interest rate, expected term, expected dividends yield, expected forfeiture rate, expected turn-over rate and the expected exercise multiple.

 

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Diluted Net Income Per Common Share

Diluted net income per common share, calculated under the treasury stock method, is based on the weighted average number of shares outstanding during the period. The Company’s outstanding securities that may potentially dilute the common stock are stock options and restricted stock awards.

Included in the Company’s calculation of diluted earnings per share for the three and nine months ended September 30, 2017 were approximately 479,000 stock options outstanding, of which approximately 102,000 and 102,000, respectively, were dilutive. In addition, there were approximately 148,000 restricted stock awards outstanding, 43,000 and 50,000 of which were dilutive for the three and nine months ended September 30, 2017, respectively.

Included in the Company’s calculation of diluted earnings per share for the three and nine months ended September 30, 2016 were approximately 469,000 stock options outstanding, of which approximately 39,000 and 29,000, respectively, were dilutive. In addition, there were approximately 97,000 restricted stock awards outstanding, of which approximately 11,000 and 7,000 were dilutive for the three and nine months ended September 30, 2016, respectively.

Estimates

The financial statements are prepared by management in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) and include estimated amounts and certain disclosures based on assumptions about future events. The Company’s critical accounting estimates include the following areas: the allowance for doubtful accounts, reserve for self-insurance claims, accounting for stock-based compensation, accounting for income taxes, business combinations and when required, the quantitative assessment of goodwill. Actual results could differ from those estimates.

Fair Value Measurements

The Company’s financial instruments consist of cash, accounts receivable, payables and debt. The carrying amounts reported on the Company’s Unaudited Condensed Consolidated Balance Sheets for cash, accounts receivable, accounts payable and accrued expenses approximate fair value because of the short-term nature of these instruments. The carrying value of the Company’s long-term debt with variable interest rates approximates fair value based on instruments with similar terms.

The Company applies fair value techniques on anon-recurring basis associated with valuing potential impairment losses related to goodwill, if required, and indefinite-lived intangible assets and also when determining the fair value of contingent consideration, if applicable. To determine the fair value in these situations, the Company uses Level 3 inputs, defined as unobservable inputs in which little or no market data exists; therefore requiring an entity to develop its own assumptions, such as discounted cash flows, or if available, what a market participant would pay on the measurement date.

The Company utilizes the income approach to estimate the fair value of its intangible assets derived from acquisitions.

Going Concern

In connection with the preparation of the financial statements for the three and nine months ended September 30, 2017, the Company conducted an evaluation as to whether there were conditions and events, considered in the aggregate, which raised substantial doubt as to the entity’s ability to continue as a going concern within one year after the date of the issuance, or the date of availability, of the financial statements to be issued. The evaluation concluded that there did not appear to be evidence of substantial doubt of the entity’s ability to continue as a going concern.

 

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New Accounting Pronouncements

In May 2014, the FASB issued ASU2014-09, “Revenue from Contracts with Customers (Topic 606),” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU2014-09 will replace most existing revenue recognition guidance in GAAP and will be effective for the Company as of January 1, 2018. The standard permits the use of either the retrospective or modified retrospective (cumulative effect) transition method and the Company has selected the modified retrospective approach. The FASB has issued and may issue in the future, interpretative guidance, which may cause the Company’s evaluation to change. The Company has completed the initial review to determine the impact ASU2014-09 and its subsequent updates will have on the Company’s consolidated financial statements or financial statement disclosures upon adoption. Based on the Company’s continued review of contracts and revenue streams, it believes that the timing and measurement of revenue for its customers will be similar to its current revenue recognition model due to the structure of payor contracts which consists of a fixed reimbursement rate that is deemed earned upon completion of a defined service. In addition, the Company has made ongoing progress around process changes and system enhancements to ensure adherence to the new standard. During the third quarter of 2017, additional resources were retained to assist in the completion of the assessment, prepare specific contract analysis and document policy changes. The Company expects that the final evaluation of the impact and implementation of system enhancements will be completed during the fourth quarter of 2017.

In February 2016, the FASB issued ASU2016-02, “Leases (Topic 842),” which replaces existing leasing rules with a comprehensive lease measurement and recognition standard and expanded disclosure requirements. ASU2016-02 will require lessees to recognize most leases on their balance sheets as liabilities, with corresponding“right-of-use” assets and is effective for annual reporting periods beginning after December 15, 2018, subject to early adoption. For income statement recognition purposes, leases will be classified as either a finance or an operating lease. The Company will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. Upon initial evaluation, the Company believes that the new standard will have a material impact on its Consolidated Balance Sheets but it will not affect its liquidity. It has been determined that the Company will need to secure new software to account for the change in accounting for leases and is currently reviewing the software options available.

In June 2016, the FASB issued ASU2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU2016-13 changes the impairment model for most financial assets and certain other instruments. Under the new standard, entities holding financial assets and net investment in leases that are not accounted for at fair value through net income are to be presented at the net amount expected to be collected. An allowance for credit losses will be a valuation account that will be deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected on the financial asset. ASU2016-13 is effective as of January 1, 2020. Early adoption is permitted. The Company is currently evaluating the impact of ASU2016-13.

In August 2016, the FASB issued ASU2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This standard amends and adjusts how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, and will require adoption on a retrospective basis unless impracticable. If impracticable the Company would be required to apply the amendments prospectively as of the earliest date possible. The Company is currently evaluating the impact that ASU2016-15 will have on its statement of cash flows but does not expect it to have a material impact.

In January 2017, the FASB issued ASU2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The new guidance eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on the current Step 1). ASU2017-04 is effective for annual and any interim impairment tests for periods beginning after December 15, 2019. The Company is currently evaluating the provisions of ASU2017-04 to determine how its goodwill impairment testing will be impacted and whether it may elect to adopt ASU2017-04 prior to the stated effective date.

In May 2017, the FASB issued ASU2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting.” ASU2017-19 clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. This pronouncement is effective for annual periods, and for interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted, and is applied prospectively to changes in terms or conditions of awards occurring on or after the adoption date. The Company is evaluating the impact of the adoption of this guidance on its financial statements but does not expect it to have a material impact.

 

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Reclassification of Prior Period Balances

Certain reclassifications have been made to prior period amounts to conform to the current-year presentation including the reporting of provision for doubtful accounts as a separate line item on the Unaudited Condensed Consolidated Statements of Income. These reclassifications have no effect on the reported net income for the three and nine months ended September 30, 2017 and 2016.

2. Sale of Adult Day Services Centers

In order to focus on providing services to consumers in their homes, effective March 1, 2017, the Company ceased the adult day services business and completed its sale of substantially all of the assets used in three adult day services centers in Illinois. The Company received proceeds of approximately $2.4 million and recorded apre-tax gain of $2.1 million on the sale of the three adult day services centers.

3. Acquisitions

On April 24, 2017, the Company entered into a definitive securities purchase agreement with HB Management Group, Inc. to purchase Options Services, Inc. d/b/a Options Home Care (“Options Home Care”). On August 1, 2017, the Company completed its acquisition of all the outstanding securities of Options Home Care for a total purchase price of $22.6 million (the “Options Purchase Price”). Options Home Care is a provider of personal care services in more than 20 counties in New Mexico and the acquisition expands the footprint of the Company’s existing operations in the state. The related acquisition costs, included in general and administrative expenses on the Company’s Unaudited Condensed Consolidated Statements of Income, were $0.7 million and were expensed as incurred. The results of Options Home Care are included on the Company’s Unaudited Condensed Consolidated Statements of Income from the date of the acquisition.

The Company’s acquisition of Options Home Care has been accounted for in accordance with ASC Topic 805, “Business Combinations,” and the resulting goodwill and other intangible assets was accounted for under ASC Topic 350, “Goodwill and Other Intangible Assets.” The acquisition was recorded at its fair value as of August 1, 2017. Under business combination accounting, the Options Purchase Price was $22.6 million and was allocated to Options Home Care’s net tangible and identifiable intangible assets based on their estimated fair values. Based upon management’s valuation, which is preliminary and subject to completion of valuation analysis, the total purchase price has been allocated as follows:

 

   Total
(Amounts  in
Thousands)
 

Goodwill

  $17,915 

Identifiable intangible assets

   4,163 

Accounts receivable

   995 

Cash

   205 

Other assets

   41 

Accrued liabilities

   (695
  

 

 

 

Total purchase price allocation

  $22,624 
  

 

 

 

Management’s assessment of qualitative factors affecting goodwill for Options Home Care includes: estimates of market share at the date of purchase; ability to grow in the market; synergy with existing Company operations; and the presence of managed care payors in the market.

Identifiable intangible assets acquired consist of trade name and customer relationships (see Note 1 for estimated useful lives of the Company’s identifiable intangible assets). The estimated fair value of identifiable intangible assets was determined with the assistance of a valuation specialist. The goodwill and intangible assets acquired are deductible for tax purposes.

The Options Home Care acquisition accounted for $3.3 million of net service revenues and $0.2 million of net income for both the three and nine months ended September 30, 2017.

The following table contains unaudited pro forma condensed consolidated income statement information of the Company had the acquisition of Options Home Care closed on January 1, 2016.

 

   For the Three Months Ended September 30,
(Amounts in Thousands)
 
   2017   2016 

Net service revenues

  $110,288   $108,859 

Operating income

   5,964    2,563 

Net income

   3,509    1,765 

Net income per common share

    

Basic income per share

  $0.31   $0.16 
  

 

 

   

 

 

 

Diluted income per share

  $0.30   $0.15 
  

 

 

   

 

 

 
   For the Nine Months Ended September 30,
(Amounts in Thousands)
 
   2017   2016 

Net service revenues

  $326,028   $313,425 

Operating income

   19,785    8,116 

Net income

   11,083    4,880 

Net income per common share

    

Basic income per share

  $0.97   $0.44 
  

 

 

   

 

 

 

Diluted income per share

  $0.95   $0.43 
  

 

 

   

 

 

 

The pro forma disclosures in the table above include adjustments for amortization of intangible assets, tax expense, and acquisition costs to reflect results that are more representative of the combined results of the transactions as if Options Home Care had been acquired effective January 1, 2016. This pro forma information is presented for illustrative purposes only and may not be indicative of the results of operations that would have actually occurred. In addition, future results may vary significantly from the results reflected in the pro forma information. The unaudited pro forma financial information does not reflect the impact of future events that may occur after the acquisition, such as anticipated cost savings from operating synergies.

 

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4. Goodwill and Intangible Assets

A summary of the goodwill activity for the nine months ended September 30, 2017 is provided below:

 

   Goodwill
(Amounts  in
Thousands)
 

Goodwill, at December 31, 2016

  $73,906 

Additions for acquisitions

   17,915 

Adjustments to previously recorded goodwill

   —   
  

 

 

 

Goodwill, at September 30, 2017

  $91,821 
  

 

 

 

The carrying amount and accumulated amortization of each identifiable intangible asset category consisted of the following as of September 30, 2017 and December 31, 2016:

 

   Customer
and referral
relationships
  Trade
names and
trademarks
  State
licenses
   Non-
competition
agreements
  Total 
   (Amounts in Thousands) 

Gross balance at December 31, 2016

  $34,672  $13,261  $150   $2,155  $50,238 

Accumulated amortization

   (26,766  (6,296  —      (1,763  (34,825
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Net Balance at December 31, 2016

  $7,906  $6,965  $150   $392  $15,413 
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Gross balance at January 1, 2017

  $34,672  $13,261  $150   $2,155  $50,238 

Additions for acquisitions

   3,291   872   —      —     4,163 

Accumulated amortization

   (28,640  (7,673  —      (1,845  (38,158
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Net Balance at September 30, 2017

  $9,323  $6,460  $150   $310  $16,243 
  

 

 

  

 

 

  

 

 

   

 

 

  

 

 

 

Amortization expense related to the identifiable intangible assets amounted to $1.2 million and $3.3 million for the three and nine months ended September 30, 2017, respectively, and $1.3 million and $3.6 million for the three and nine months ended September 30, 2016, respectively. Goodwill, certificates of need, and state licenses are not amortized pursuant to ASC Topic 350.

 

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5. Details of Certain Balance Sheet Accounts

Prepaid expenses and other current assets consisted of the following:

 

   September 30, 2017   December 31, 2016 
   (Amounts in Thousands) 

Prepaid health insurance (1)

  $3,124   $2,238 

Prepaid workers’ compensation and liability insurance

   833    1,190 

Prepaid rent

   489    568 

Workers’ compensation insurance receivable

   592    747 

Other

   1,229    1,255 
  

 

 

   

 

 

 
  $6,267   $5,998 
  

 

 

   

 

 

 

Accrued expenses consisted of the following:

 

   September 30, 2017   December 31, 2016 
   (Amounts in Thousands) 

Accrued payroll

  $21,708   $17,509 

Accrued workers’ compensation insurance

   13,008    12,823 

Accrued health insurance (1)

   6,106    4,092 

Indemnification reserve (2)

   419    419 

Accrued payroll taxes

   1,403    1,747 

Accrued professional fees

   971    1,485 

Accrued severance (3)

   879    1,326 

Accrued restructuring (4)

   1,099    1,786 

Other

   1,349    1,416 
  

 

 

   

 

 

 
  $46,942   $42,603 
  

 

 

   

 

 

 

 

(1)The Company provides health insurance coverage to qualified union employees providing personal care services in Illinois through a Taft-Hartley multi-employer health and welfare plan under Section 302(c)(5) of the Labor Management Relations Act of 1947. The Company’s insurance contributions equal the amount reimbursed by the State of Illinois. Contributions are due within five business days from the date the funds are received from the State of Illinois. Amounts due of $2.6 million and $2.2 million for health insurance reimbursements and contributions were reflected in prepaid insurance and accrued insurance as of September 30, 2017 and December 31, 2016, respectively.
(2)As a condition of the sale of substantially all of the assets used in the Company’s home health business to subsidiaries of LHC Group, Inc. (“LHCG”) in February 2013, the Company is responsible for any adjustments to Medicare and Medicaid billings prior to the closing. In connection with an internal evaluation of the Company’s billing processes, the Company discovered documentation errors in a number of claims that it had submitted to Medicare. Consistent with applicable law, the Company voluntarily remitted $1.8 million to the U.S. government in March 2014. As of September 30, 2017, the Company, using its best judgment, has estimated a total of $0.4 million for billing adjustments for 2013, 2012 and 2011 services which may be subject to Medicare audits.
(3)Accrued severance represents amounts payable to terminated employees with employment and/or separation agreements with the Company.
(4)Accrued restructuring includes reserves for lease commitments related to the closure of three adult day services centers in Illinois during the third quarter of 2016.

 

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6. Long-Term Debt

Long-term debt consisted of the following:

 

   September 30, 2017   December 31, 2016 
   (Amounts in Thousands) 

Term loan under the new credit facility

  $45,000   $—   

Term loan under the terminated credit facility

   —      24,063 

Capital leases

   1,366    2,433 

Less unamortized issuance costs

   (2,587   (1,483
  

 

 

   

 

 

 

Total

  $43,779   $25,013 

Less current maturities

   (3,407   (2,531
  

 

 

   

 

 

 

Long-term debt

  $40,372   $22,482 
  

 

 

   

 

 

 

In accordance with ASU2015-03, “Simplifying the Presentation of Debt Issuance Costs,” the Company has classified the debt issuance costs as current portion of long-term debt or long-term debt, less current portion as of September 30, 2017 and December 31, 2016.

Senior Secured Credit Facility

On May 8, 2017, the Company entered into a credit agreement (the “Credit Agreement”) to obtain a new credit facility with certain lenders and Capital One, N.A., as a lender and swing lender and as agent for all lenders. This credit facility totals $250.0 million, replaces the Company’s previous senior secured credit facility totaling $125.0 million with certain lenders and Fifth Third Bank as agent (“Terminated Senior Secured Credit Facility”, see description below for more details), and terminates the Company’s Second Amended and Restated Credit and Guaranty Agreement, dated as of November 10, 2015. The new credit facility includes a $125.0 million revolving loan, a $45.0 million term loan and an $80.0 million delayed draw term loan. The maturity of the new credit facility is five years, although the delayed draw term loan is only available until November 8, 2018. Under the terms of an accordion feature of the Credit Agreement, $100.0 million is also available for incremental term loans. Fundings under the delayed draw term loans and the incremental term loans are limited to financing or refinancing Permitted Acquisitions (as defined in the Credit Agreement). The availability of additional draws under the revolving credit portion of the Company’s new credit facility is conditioned, among other things, upon (after giving effect to such draws) the ratio of Consolidated Total Indebtedness (as defined in the Credit Agreement), less subordinated indebtedness, to Consolidated Adjusted EBITDA (as defined in the Credit Agreement) not exceeding 4.25:1.00. In connection with the new credit facility, the Company incurred $2.8 million of debt issuance costs.

Addus HealthCare is the borrower, with the Company and substantially all of the subsidiaries of the Company as guarantors under the new credit facility. The new credit facility is secured by a first priority security interest in all of the Company’s and the other credit parties’ current and future tangible and intangible assets, including the shares of stock of the borrower and subsidiaries.

Interest on the Company’s new credit facility may be payable at (x) the sum of (i) an applicable margin ranging from 1.50% to 2.25% based on the applicable senior leverage ratio (provided that the applicable margin will be 1.50% through approximately October 31, 2017) plus (ii) a base rate equal to the greatest of (a) the rate of interest last quoted by The Wall Street Journal as the “prime rate,” (b) the sum of the federal funds rate plus a margin of 0.50% and (c) the sum of the adjusted LIBOR that would be applicable to a loan with an interest period of one month advanced on the applicable day (not to be less than 0.00%) plus a margin of 1.00% or (y) the sum of (i) an applicable margin ranging from 2.50% to 3.25% based on the applicable leverage ratio (provided that the applicable margin will be 2.50% through approximately October 31, 2017) plus (ii) the offered rate per annum for the applicable interest period that appears on Reuters Screen LIBOR01 Page. Swing loans may not be LIBOR loans.

The Company pays a fee ranging from 0.25% to 0.50% based on the applicable leverage ratio times the unused portion of the revolving portion of the new credit facility (provided that the fee will be 0.25% through approximately October 31, 2017).

In July 2017, the Company drew a total of $30.0 million on the revolving credit line under the new credit facility primarily to fund the acquisition of Options Home Care. The Company repaid the balance in August 2017. As of September 30, 2017, the Company had a total of $45.0 million of term loans outstanding on the new credit facility and the total availability under the revolving credit loan facility was $97.9 million.

The Credit Agreement contains customary affirmative covenants regarding, among other things, the maintenance of records, compliance with laws, maintenance of permits, maintenance of insurance and property and payment of taxes. The Credit Agreement also contains certain customary financial covenants and negative covenants that, among other things, include a requirement to maintain a minimum fixed charge coverage ratio, a requirement to stay below a maximum senior leverage ratio and a requirement to stay below a maximum permitted amount of capital expenditures, as well as restrictions on guarantees, indebtedness, liens, investments and loans, subject to customary carve outs, a restriction on dividends (provided that Addus HealthCare may make distributions to the Company in an amount that does not exceed $5.0 million in any year absent of an event of default, plus limited exceptions for tax and administrative distributions), a restriction on the ability to consummate acquisitions in amounts exceeding $60.0 million individually and $80.0 million in the aggregate each year (in each case, without the consent of the lenders), restrictions on mergers, dispositions of assets, and affiliate transactions, and restrictions on fundamental changes and lines of business. As of September 30, 2017, the Company was in compliance with all of its Credit Agreement covenants.

 

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Terminated Senior Secured Credit Facility

Prior to May 8, 2017, the Company was a party to the Terminated Senior Secured Credit Facility with certain lenders and Fifth Third Bank, as agent and letters of credit issuer. The Terminated Senior Secured Credit Facility provided a $100.0 million revolving line of credit, a delayed draw term loan facility of up to $25.0 million and an uncommitted incremental term loan facility of up to $50.0 million, which was to expire on November 10, 2020 and included a $35.0 million sublimit for the issuance of letters of credit. The Terminated Senior Secured Credit Facility increased the specified advance multiple from 3.25 to 3.75 to 1.00 and the maximum permitted senior leverage ratio from 3.50 to 4.00 to 1.00. Except as modified by the May 24, 2016 amendment, the Terminated Senior Secured Credit Facility contained the same material terms as the previous agreement dated November 10, 2015. Substantially all of the subsidiaries of Holdings wereco-borrowers, and Holdings had guaranteed the borrowers’ obligations under the Terminated Senior Secured Credit Facility. The Terminated Senior Secured Credit Facility was secured by a first priority security interest in all of Holdings’ and the borrowers’ current and future tangible and intangible assets, including the shares of stock of the borrowers.

The availability of funds under the revolving credit portion of the Company’s Terminated Senior Secured Credit Facility was based on the lesser of (i) the product of adjusted EBITDA, as defined in the terminated credit agreement, for the most recent12-month period for which financial statements had been delivered under the credit agreement multiplied by the specified advance multiple, up to 3.75, less the outstanding senior indebtedness and letters of credit, and (ii) $100.0 million less the outstanding revolving loans and letters of credit. Interest on the Terminated Senior Secured Credit Facility might have been payable at (x) the sum of (i) an applicable margin ranging from 2.00% to 2.50% based on the applicable leverage ratio plus (ii) a base rate equal to the greatest of (a) the rate of interest last quoted by The Wall Street Journal as the “prime rate,” (b) the sum of the federal funds rate plus a margin of 0.50% and (c) the sum of the adjusted LIBOR that would have been applicable to a loan with an interest period of one month advanced on the applicable day plus a margin of 3.00% or (y) the sum of (i) an applicable margin ranging from 3.00% to 3.50% based on the applicable leverage ratio plus (ii) the adjusted LIBOR that would have been applicable to a loan with an interest period of one, two or three months advanced on the applicable day or (z) the sum of (i) an applicable margin ranging from 3.00% to 3.50% based on the applicable leverage ratio plus (ii) the daily floating LIBOR that would have been applicable to a loan with an interest period of one month advanced on the applicable day. The Company paid a fee ranging from 0.25% to 0.50% per annum based on the applicable leverage ratio times the unused portion of the revolving portion of the credit facility. Issuedstand-by letters of credit were charged at a rate equal to the applicable margin for LIBOR loans payable quarterly.

On May 8, 2017, the Company repaid the outstanding debt balance of $23.8 million together with accrued interest of $0.1 million and terminated the Terminated Senior Secured Credit Facility. In connection with the termination, the Company wrote off the unamortized debt issuance costs under the Terminated Senior Secured Credit Facility in the amount of $1.3 million, which was included in interest expense on the Company’s Unaudited Condensed Consolidated Statements of Income.

For the period January 1, 2017 through May 7, 2017, the Company drew and subsequently repaid $20.0 million of its revolving credit line to fund operations. As of December 31, 2016, the Company had a total of $24.1 million outstanding on the Terminated Senior Secured Credit Facility and the total availability under the revolving credit loan facility was $79.7 million.

 

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Table of Contents

7. Income Taxes

A reconciliation of the statutory federal tax rate of 35.0% for the three and nine months ended September 30, 2017 and 34.3% for the three and nine months ended September 30, 2016 is summarized as follows:

 

   Three Months Ended September 30, 
   2017  2016 

Federal income tax at statutory rate

   35.0  34.3

State and local taxes, net of federal benefit

   4.4   5.2 

Jobs tax credits, net

   (7.7  (27.5

Nondeductible permanent items

   0.5   2.6 

Other

   0.0   0.0 
  

 

 

  

 

 

 

Effective income tax rate

   32.2  14.6
  

 

 

  

 

 

 
   Nine Months Ended September 30, 
   2017  2016 

Federal income tax at statutory rate

   35.0  34.3

State and local taxes, net of federal benefit

   4.9   5.2 

Jobs tax credits, net

   (7.5  (16.5

Nondeductible meals and entertainment

   0.5   2.2 

Other

   (0.8  0.0 
  

 

 

  

 

 

 

Effective income tax rate

   32.1  25.2
  

 

 

  

 

 

 

8. Commitments and Contingencies

Legal Proceedings

From time to time, the Company is subject to legal and/or administrative proceedings incidental to its business. It is the opinion of management that the outcome of pending legal and/or administrative proceedings will not have a material effect on the Company’s financial position and results of operations.

On January 20, 2016, the Company was served with a lawsuit filed in the United States District Court for the Northern District of Illinois against the Company and Cigna Corporation by Stop Illinois Marketing Fraud, LLC, a qui tam relator formed for the purpose of bringing this action. In the action, the plaintiff alleges, inter alia, violations of the federal False Claims Act relating primarily to allegations of violations of the federal Anti-Kickback Statute and allegedly improper referrals of patients from the Company’s home care division to the Company’s home health business, substantially all of which was sold in 2013. The plaintiff seeks to recover damages, fees and costs under the federal False Claims Act including treble damages, civil penalties and its attorneys’ fees. The U.S. government has declined to intervene at this time. Plaintiff amended its complaint on April 4, 2016 to include additional allegations in support of its False Claims Act claims, including alleged violations of the federal Anti-Kickback Statute. The Company and Cigna Corporation filed a motion to dismiss the amended complaint on June 6, 2016. On February 3, 2017, the Court granted Cigna Corporation’s motion to dismiss in full, and granted the Company’s motion to dismiss in part allowing Plaintiff another chance to amend its complaint. Plaintiff timely filed a second amended complaint on March 10, 2017, withdrawing its conspiracy claim under the Federal False Claims Act and adding an explicit claim under the Illinois False Claims Act for the same underlying kickback allegations. On April 7, 2017, the Company filed a partial motion to dismiss the Second Amended Complaint, which has not yet been ruled on by the court. On May 24, 2017, the State of Illinois filed notice that it was declining to intervene in the plaintiff’s claim under the Illinois False Claims Act. The Company intends to defend the litigation vigorously and believes the case will not have a material adverse effect on its business, financial condition or results of operations.

On May 4, 2016, the Company, together with 59 other social service and healthcare providers in the State of Illinois, filed an action in the Circuit Court of Cook County, Illinois against certain individuals in their official capacities as agents of the Illinois Department of Human Services, the Illinois Department on Aging, the Illinois Department of Public Health, the Illinois Department of HealthCare and Family Services, the Illinois Criminal Justice Information Authority, the Illinois Department of Corrections and the Illinois Department of Central Management Services, including the Governor of Illinois. On July 20, 2016, a third amended complaint was filed by the plaintiffs, who now comprise 97 similarly situated providers and provider organizations. In the action, the plaintiffs, including the Company, allege to have entered into contracts with the various defendants based in part on the Governor’s proposed budget, which provided for funding for the services to be provided by plaintiffs thereunder. The Governor subsequently vetoed all of the relevant appropriations bills on June 25, 2015 and again vetoed an appropriations bill that included funding for the contracts on June 10, 2016. While the defendant officer and agency heads have continued to enforce such contracts, since August 1, 2016, the Company received an aggregate of approximately $65.4 million in payments from the State of Illinois from the stopgap budget enacted on June 30, 2016. In those actions, plaintiffs alleged the defendant officers and agency heads acted beyond the scope of their legal authority in entering into and enforcing contracts with no intent to perform under such contracts by failing to pay amounts due thereunder when due. The action also alleged that the Governor of Illinois’ vetoes of appropriations for such contracts violated the Illinois Constitution. Plaintiffs sought injunctive relief to payment of overdue bills to prevent irreparable harm, including imperiling the State of Illinois’s infrastructure for delivery of human services. On August 31, 2016, the Circuit Court denied plaintiffs’ petitions for declaratory and injunctive relief and dismissed the actions with prejudice. Plaintiffs timely filed a notice of appeal on September 30, 2016, and on June 15, 2017, the Appellate Court of Illinois affirmed the Circuit Court’s dismissal of the plaintiffs’ third amended complaint. The plaintiffs elected not to pursue any further appeals, and in July 2017, the Company began receiving delayed payments from the State of Illinois for services provided in prior state fiscal years. As of September 30, 2017, with the exception of normal levels of disputed claims, the Company has been paid for all claims from prior state fiscal years.

Employment Agreements

The Company has entered into employment agreements with certain members of senior management. The terms of these agreements are up to four years with auto-renewal provisions thereafter, and includenon-compete and nondisclosure provisions, as well as provide for defined severance payments in the event of termination.

A substantial percentage of the Company’s workforce is represented by the Service Employees International Union (“SEIU”). The Company has a national agreement with the SEIU which is currently under negotiation, as well as numerous agreements with local SEIU affiliates which are renegotiated from time to time. These negotiations are often initiated when the Company receives increases in hourly rates from various state agencies. Upon expiration of these collective bargaining agreements, the Company may not be able to negotiate labor agreements on satisfactory terms with these labor unions.

9. Severance and Restructuring

In 2016, the Company initiated steps to streamline its operations. The Company incurred total expenses related to these initiatives of approximately $0.6 million and $1.5 million for the three and nine months ended September 30, 2017, respectively, and approximately $4.0 million and $8.3 million for the three and nine months ended September 30, 2016, respectively. These costs are included in general and administrative expenses on the Unaudited Condensed Consolidated Statements of Income. The Company expects some additional restructuring and other costs to occur, however, the amount and timing cannot be determined at this time. The expenses recorded for the three and nine months ended September 30, 2017 primarily included costs related to terminated employees, fees related to termination of professional services relationships, other contract termination costs and asset write-offs. The expenses recorded for the three and nine months ended September 30, 2016 included costs related to terminated employees and other direct costs including contract termination costs, accelerated depreciation and asset write-offs.

 

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The following provides the components of and changes in our severance and restructuring accruals:

 

   Employee
Termination
Costs
   Restructuring
and Other
Costs
 
   (Amounts in Thousands) 

Balance at December 31, 2016

  $1,326   $1,786 

Provision

   993    551 

Utilization

   (1,440   (1,238
  

 

 

   

 

 

 

Balance at September 30, 2017

  $879   $1,099 
  

 

 

   

 

 

 

Employee termination costs represent accrued severance payable to terminated employees with employment and/or separation agreements with the Company. The terminations resulted mainly from changes made to the executive leadership team during the nine months ended September 30, 2017 and 2016.

Restructuring and other costs for the nine months ended September 30, 2017 primarily consisted of fees for the termination of professional services relationships, other contract termination costs and asset write-offs. For the nine months ended September 30, 2016, restructuring and other costs consisted of fees for the termination of an employee incentive program, costs related to lease commitments and write-offs of leasehold improvements, unused office space and property and equipment resulting from the closure of three adult day services centers in Illinois, and fees for the termination of various contracts with outside vendors.

The aforementioned accruals are included in Accrued Expenses on the Unaudited Condensed Consolidated Balance Sheets and the aforementioned expenses are included in General and Administrative Expenses on the Unaudited Condensed Consolidated Statements of Income.

10. Significant Payors

A substantial portion of the Company’s net service revenues and accounts receivable are derived from services performed for federal, state and local governmental agencies. The Illinois Department on Aging accounted for 36.6% and 42.6% of the Company’s net service revenues for the three months ended September 30, 2017 and 2016, respectively, and 36.6% and 43.6% of the Company’s net service revenues for the nine months ended September 30, 2017 and 2016, respectively.

The related receivables due from the Illinois Department on Aging represented 36.7% and 55.4% of the Company’s accounts receivable at September 30, 2017 and December 31, 2016, respectively.

The State of Illinois’s payments have been delayed in the past and may continue to be delayed in the future due to budget disputes that began in 2015. The State of Illinois did not adopt a comprehensive budget for fiscal year 2016, which ended on June 30, 2016, or a comprehensive budget for fiscal year 2017, which ended on June 30, 2017. On July 6, 2017, the State of Illinois passed a balanced state budget for fiscal year 2018, which began on July 1, 2017. With this budget, the Illinois Department on Aging is authorized to pay for theNon-Medicaid consumers the Company served in prior fiscal years. In July 2017, the Company began receiving delayed payments. As of September 30, 2017, the Company has been paid for substantially all claims from prior state fiscal years.

11. Concentration of Cash

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash. The Company maintains cash with financial institutions which, at times, may exceed federally insured limits. The Company believes it is not exposed to any significant credit risk on cash.

12. Subsequent Events

On October 1, 2017, the Company sold its 10% membership interests in two joint ventures with LHCG, which were reported as Investments in Joint Ventures on the Company’s Unaudited Condensed Consolidated Balance Sheet at September 30, 2017.

On October 1, 2017, the Company entered into an Asset Purchase Agreement with Community Partnered Resources, Inc. d/b/a Sun Cities CareGivers/Sun Cities Homecare (“Sun Cities”) pursuant to which the Company acquired substantially all of the assets of Sun Cities.

 

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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 Form10-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 forward-looking statements involve a variety of risks and uncertainties that could cause actual results to differ materially from those described therein. These risks and uncertainties include, but are not limited to, the risks set forth in our filings with the Securities and Exchange Commission from time to time, including the risk factors set forth in Part I, Item 1A of our Annual Report on Form10-K for the period ended December 31, 2016, filed on March 15, 2017. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, you should not rely on any forward-looking statement as a prediction of future events. We expressly disclaim any obligation or undertaking and we do not intend to release publicly any updates or changes in our expectations concerning the forward-looking statements or any changes in events, conditions or circumstances upon which any forward-looking statement may be based, except as required by law.

Overview

We operate as one business segment and are a provider of comprehensive personal care services, which are provided principally in the home. Our personal care services provide assistance with activities of daily living. Our consumers are primarily persons who are at risk of hospitalization or institutionalization, such as the elderly, chronically ill and disabled. Our payor clients include federal, state and local governmental agencies, managed care organizations, commercial insurers and private individuals. As of September 30, 2017, we provided personal care services to approximately 35,000 consumers through 114 locations across 24 states. For the nine months ended September 30, 2017 and 2016, we served approximately 49,000 and 45,000 discrete consumers, respectively.

A summary of our financial results for the three and nine months ended September 30, 2017 and 2016 is provided in the table below:

 

   For the Three Months Ended September 30, 
   2017   2016 
   (Amounts in Thousands) 

Net service revenues

  $108,592   $103,502 

Net income

   3,408    1,699 

Total assets

   267,901    230,440 
   For the Nine Months Ended September 30, 
   2017   2016 
   (Amounts in Thousands) 

Net service revenues

  $313,758   $297,032 

Net income

   10,366    4,456 

Total assets

   267,901    230,440 

Our services are predominantly provided in the home under agreements with state and local government agencies. Our consumers are predominately “dual eligible,” meaning they are eligible to receive both Medicare and Medicaid benefits. The federal government permits states to initiate dual eligible demonstration programs and other managed Medicaid initiatives designed to coordinate the services provided through Medicare and Medicaid, with the overall objective of improving care quality and reducing costs. States are increasingly implementing managed care programs to deliver healthcare services to Medicaid enrollees. Managed care organizations have an economic incentive to better manage the healthcare expenditures of their membership, and therefore seek to provide care in a more cost-effective setting, such as a patient’s home. Managed care revenues accounted for 34.0% and 25.8% of our revenue mix during the three months ended September 30, 2017 and 2016, respectively, and 32.5% and 24.4% of our revenue mix during the nine months ended September 30, 2017 and 2016, respectively.

Our model is designed to improve consumer outcomes and satisfaction, as well as lower the cost of acute care treatment and reduce service duplication. We believe our model to be especially valuable to managed care organizations that have economic responsibility for both personal care services as well as acute care expenditures. We believe our model is a differentiator and as a result we expect to receive increased referrals from managed care organizations.

The personal care services we provide include assistance with bathing, grooming, oral care, assistance with feeding and dressing, medication reminders, meal planning and preparation, housekeeping, and transportation services and other activities of daily living. We provide thesenon-medical services on a long-term, continuous basis, with an average duration of approximately 26 months per consumer.

We utilize home care aides to observe and report changes in the condition of our consumers for the purpose of early intervention in the disease process, with the goal of reducing the cost of medical services by preventing unnecessary emergency room visits and/or hospital admissions andre-admissions. We coordinate the services provided by our team with those of other healthcare agencies as appropriate. Changes in our consumer’s conditions are evaluated by appropriately trained managers and may result in the condition being reported to the consumer’s case manager at the managed care organization or other payor and in some cases to the consumer’s primary care physicians for treatment or otherfollow-up. We believe this approach to the care of our consumers and the integration of our services into the broader healthcare continuum are attractive to managed care organizations and other payors who are ultimately responsible for the healthcare needs and costs of our consumers.

We utilize Interactive Voice Response (“IVR”) systems and smart phone applications to communicate with the majority of our home care aides. Through these technologies our aides are able to report changes in health conditions with alerts forwarded to an appropriate manager for triage and evaluation. In addition, we use this technology to record basic transaction information about each visit, record start and end times for a scheduled shift, track mileage reimbursement, send text messages to the home care aide and communicate basic payroll information.

In addition to our focus on organic growth, we have been growing through acquisitions, which have expanded our presence in current markets or which have facilitated our entry into new markets where the personal care business has been moving to managed care organizations.

On April 24, 2017, we entered into a definitive securities purchase agreement with HB Management Group, Inc. to purchase Options Services, Inc. d/b/a Options Home Care (“Options Home Care”). On August 1, 2017, we completed our acquisition of all the outstanding securities of Options Home Care for a total purchase price $22.6 million. Options Home Care is a provider of personal care services in more than 20 counties in New Mexico and the acquisition expands the footprint of our existing operations in the state.

On October 1, 2017, we sold our 10% membership interests in two joint ventures with LHCG, which were reported as Investments in Joint Ventures on our Unaudited Condensed Consolidated Balance Sheet at September 30, 2017.

On October 1, 2017, we entered into an Asset Purchase Agreement with Community Partnered Resources, Inc. d/b/a Sun Cities CareGivers/Sun Cities Homecare (“Sun Cities”) pursuant to which we acquired substantially all of the assets of Sun Cities.

 

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Business

As of September 30, 2017, we provided our personal care services through 114 locations across 24 states.

Our payor clients are principally federal, state and local governmental agencies and, increasingly, 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 with which we are seeking to grow our business given our emphasis on coordinated care and the reduction of the need for acute care.

For the three and nine months ended September 30, 2017 and 2016 our payor revenue mix was:

 

   For the Three Months Ended September 30,  For the Nine Months Ended September 30, 
   2017  2016  2017  2016 

State, local and other governmental programs

   63.6  70.8  64.8  72.0

Managed care organizations

   34.0   25.8   32.5   24.4 

Private pay

   1.8   2.3   2.0   2.5 

Commercial insurance

   0.6   1.1   0.7   1.1 
  

 

 

  

 

 

  

 

 

  

 

 

 
   100.0  100.0  100.0  100.0

We derive a significant amount of our net service revenues from our operations in Illinois, which represented 52.3% and 53.0% of our total net service revenues for the three months ended September 30, 2017 and 2016, respectively. Net service revenues from our operations in Illinois represented 52.7% and 53.8% of our total net service revenues for the nine months ended September 30, 2017 and 2016, respectively.

A significant amount of our net service revenues are derived from one payor client, the Illinois Department on Aging, which accounted for 36.6% and 42.6% of our total net service revenues for the three months ended September 30, 2017 and 2016, respectively. The Illinois Department on Aging accounted for 36.6% and 43.6% of our total net service revenues for the nine months ended September 30, 2017 and 2016, respectively.

The State of Illinois’s payments have been delayed in the past and may continue to be delayed in the future due to budget disputes that began in 2015. The State of Illinois did not adopt a comprehensive budget for fiscal year 2016, which ended on June 30, 2016, or a comprehensive budget for fiscal year 2017, which ended on June 30, 2017. On July 6, 2017, the State of Illinois passed a balanced budget for state fiscal year 2018, which began on July 1, 2017. With this budget, the Illinois Department on Aging is authorized to pay for theNon-Medicaid consumers we served in prior fiscal years. In July 2017, we began receiving delayed payments. As of September 30, 2017, we have been paid for substantially all claims from prior state fiscal years.

We measure the performance of our business using a number of different metrics, including billable hours, billable hours per business day, revenues per billable hour and the number of consumers, or census.

Components of our Statements of Income

Net Service Revenues

We generate net service revenues by providing our services directly to consumers and primarily on an hourly basis. We receive payment for providing such services from our payor clients, including federal, state and local governmental agencies, managed care organizations, commercial insurers and private consumers. Net service revenues are principally provided based on authorized hours, determined by the relevant agency, at an hourly rate which is either contractual or fixed by legislation and are recognized at the time services are rendered.

Cost of Service Revenues

We incur direct care wages, payroll taxes and benefit-related costs in connection with providing our services. We also provide workers’ compensation and general liability coverage for our employees.

Employees are also reimbursed for their travel time and related travel costs.

General and Administrative Expenses

Our general and administrative expenses include our costs for operating our network of local agencies and our administrative offices.

Our agency expenses consist of costs for supervisory personnel, our community care supervisors and office administrative costs. Personnel costs include wages, payroll taxes, and employee benefits. Facility costs including rents, utilities, postage, telephone and office expenses. Our support center and executive office includes costs for accounting, information systems, human resources, billing and collections, contracting, marketing and executive leadership. These expenses consist of compensation, including stock-based compensation, payroll taxes, employee benefits, legal, accounting and other professional fees, travel, general insurance, rents and related facility costs.

In 2016, we initiated steps to streamline our operations. We incurred total expenses related to these initiatives of approximately $0.6 million and $1.5 million for the three and nine months ended September 30, 2017, and approximately $4.0 million and $8.3 million for the three and nine months ended September 30, 2016, respectively. These costs are included in general and administrative expenses. We expect some additional restructuring and other costs to occur, however, the amount and timing cannot be determined at this time. The expenses recorded for the three and nine months ended September 30, 2017 included costs related to terminated employees and fees related to termination of professional services relationships, other contract termination costs and asset write-offs. The expenses recorded for the three and nine months ended September 30, 2016 included costs related to terminated employees and other direct costs including contract termination costs, accelerated depreciation and asset write-offs.

Depreciation and Amortization Expenses

We amortize our intangible assets with finite lives, consisting of customer and referral relationships, trade names, trademarks andnon-compete agreements, principally using accelerated methods based upon their estimated useful lives. Depreciable assets consist principally of furniture and equipment, network administration and telephone equipment, and operating system software. Depreciable and leasehold assets are depreciated or amortized on a straight-line method over their useful lives or, if less and if applicable, their lease terms.

Provision for Doubtful Accounts

We establish our allowance for doubtful accounts to the extent it is probable that a portion or all of a particular account will not be collected. We establish our provision for doubtful accounts primarily by analyzing historical trends and the aging of receivables. In our evaluation, we consider other factors including: delays in payment trends in individual states due to budget or funding issues; billing conversions related to acquisitions or internal systems; resubmission of bills with required documentation and disputes with specific payors. An allowance for doubtful accounts is maintained at a level that our management believes is sufficient to cover potential losses. However, actual collections could differ from our estimates.

 

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Interest Income

Illinois law entitles designated service program providers to receive a prompt payment interest penalty based on qualifying services approved for payment that remain unpaid after a designated period of time. As the amount and timing of the receipt of these payments are not certain, the interest income is recognized when received. For the three and nine months ended September 30, 2017 and 2016, we did not receive any prompt payment interest.

Interest Expense

Interest expense is reported in the Unaudited Condensed Consolidated Statements of Income when incurred and consists of (i) interest and unused credit line fees on our new credit facility and our Terminated Senior Credit Facility (as defined under Senior Secured Credit Facility below), (ii) interest on our capital lease obligations and (iii) amortization andwrite-off of debt issuance costs.

Other Income

For the three and nine months ended September 30, 2017, other income of $64,000 and $0.2 million, respectively, consisted of income distributions received from the cost method investments in joint ventures, which were sold on October 1, 2017. For the three and nine months ended September 30, 2016, we recorded $0.1 million of other income. We accounted for this income in accordance with Accounting Standards Codification (“ASC”) Topic 325, “Investments—Other.” and recognized the net accumulated earnings only to the extent distributed by the joint ventures on the date received.

Income Tax Expense

All of our income is from domestic sources. We incur state and local taxes in states in which we operate. Our federal statutory rate was 35.0% and 34.3% for the three months ended September 30, 2017 and 2016, respectively, and 35.0% and 34.3% for the nine months ended September 30, 2017 and 2016, respectively. The effective income tax rate was 32.2% and 14.6% for the three months ended September 30, 2017 and 2016, respectively, and 32.1% and 25.2% for the nine months ended September 30, 2017 and 2016, respectively. The difference between federal statutory and effective income tax rates is principally due to the inclusion of state taxes and the use of federal employment tax credits that lower our effective tax rate.

Results of Operations

Three Months Ended September 30, 2017 Compared to Three Months Ended September 30, 2016

The following table sets forth, for the periods indicated, our unaudited condensed consolidated results of operations.

 

   For the Three Months Ended September 30,       
   2017  2016  Change 
   Amount  % Of Net
Service
Revenue
  Amount  % Of Net
Service
Revenue
  Amount  % 
   (Amounts in Thousands, Except Percentages) 

Net service revenues

  $108,592   100.0 $103,502   100.0 $5,090   4.9

Cost of service revenues

   79,539   73.2   76,079   73.5   3,460   4.5 
  

 

 

   

 

 

   

 

 

  

Gross margin

   29,053   26.8   27,423   26.5   1,630   5.9 

General and administrative expenses

   19,359   17.8   21,299   20.6   (1,940  (9.1

Depreciation and amortization

   1,781   1.7   1,721   1.7   60   3.5 

Provision for doubtful accounts

   2,106   1.9   1,908   1.8   198   10.4 
  

 

 

   

 

 

   

 

 

  

Total operating expenses

   23,246   21.4   24,928   24.1   (1,682  (6.7
  

 

 

   

 

 

   

 

 

  

Operating income

   5,807   5.4   2,495   2.4   3,312   132.7 
  

 

 

   

 

 

   

 

 

  

Interest income

   (30  —     (16  —     (14  87.5 

Interest expense

   870   0.8   648   0.6   222   34.3 
  

 

 

   

 

 

   

 

 

  

Total interest expense, net

   840   0.8   632   0.6   208   32.9 

Other income

   64   —     126   0.1   (62  (49.2
  

 

 

   

 

 

   

 

 

  

Income before income taxes

   5,031   4.6   1,989   1.9   3,042   152.9 

Income tax expense

   1,623   1.5   290   0.3   1,333   459.7 
  

 

 

   

 

 

   

 

 

  

Net income

  $3,408   3.1  $1,699   1.6  $1,709   100.6 
  

 

 

   

 

 

   

 

 

  

Business Metrics (Actual Numbers, Except Billable Hours in Thousands)

       

Average billable census(1)

   34,935    34,292    643   1.9

Billable hours(2)

   6,049    5,972    77   1.3 

Average billable hours per census per month

   57.7    58.1    (0.4  (0.7

Billable hours per business day

   93,054    90,490    2,564   2.8 

Revenues per billable hour

  $17.95   $17.33   $0.62   3.6

 

(1)Average billable census is the number of unique clients receiving a billable service during a period.
(2)Billable hours is the total number of hours provided to clients during a period.

 

 

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Net service revenues from federal, state, local and other governmental programs accounted for 63.6% and 70.8% of net service revenues for the three months ended September 30, 2017 and 2016, respectively. Managed care organizations accounted for 34.0% and 25.8% of net service revenues for the three months ended September 30, 2017 and 2016, respectively, with commercial insurance payors and private pay accounting for the remainder of net service revenues. A significant amount of our net service revenues for the three months ended September 30, 2017 and 2016 were derived from one payor client, the Illinois Department on Aging, which accounted for 36.6% and 42.6% respectively, of our total net service revenues.

Net service revenues increased by $5.1 million, or 4.9%, to $108.6 million for the three months ended September 30, 2017 compared to $103.5 million for the same period in 2016. The increase was primarily due to a 1.9% increase in average billable census and a 3.6% increase in revenues per billable hour in the three months ended September 30, 2017 as compared to the three months ended September 30, 2016.

Gross margin increased to 26.8% for the three months ended September 30, 2017, compared to 26.5% for the same period in 2016. This increase was primarily due to our sale of the lower margin three adult day services centers in March 2017.

General and administrative expenses, expressed as a percentage of net service revenues decreased to 17.8% for the three months ended September 30, 2017, from 20.6% for the three months ended September 30, 2016. General and administrative expenses decreased to $19.4 million as compared to $21.3 million for the three months ended September 30, 2017 and 2016, respectively. The decrease in general and administrative expenses was primarily due to a decrease in severance and restructuring costs in the total amount of $3.3 million resulting from streamlining our operations and costs saving initiatives, which was offset by an increase in administrative employee wages, taxes and benefit costs of $0.7 million and an increase in acquisition expenses of $0.6 million.

Depreciation and amortization expense amounted to $1.8 million and $1.7 million for the three months ended September 30, 2017 and 2016, respectively. Amortization of intangibles, which are principally amortized using accelerated methods, totaled $1.2 million and $1.3 million for the three months ended September 30, 2017 and 2016, respectively.

Provision for doubtful accounts increased by $0.2 million to $2.1 million for the three months ended September 30, 2017 compared to $1.9 million for the same period in 2016. The increase was primarily due to additional reserves needed as a result of the general increase in our overall business.

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

The following table sets forth, for the periods indicated, our unaudited condensed consolidated results of operations.

 

   For the Nine Months Ended September 30,       
   2017  2016  Change 
   Amount  % Of Net
Service
Revenue
  Amount  % Of Net
Service
Revenue
  Amount  % 
   (Amounts in Thousands, Except Percentages) 

Net service revenues

  $313,758   100.0 $297,032   100.0 $16,726   5.6

Cost of service revenues

   228,877   72.9   219,594   73.9   9,283   4.2 
  

 

 

   

 

 

   

 

 

  

Gross margin

   84,881   27.1   77,438   26.1   7,443   9.6 

General and administrative expenses

   57,239   18.2   59,864   20.1   (2,625  (4.4

Gain on sale of adult day services centers

   (2,065  (0.6  —     —     (2,065 

Depreciation and amortization

   4,811   1.5   4,943   1.7   (132  (2.7

Provision for doubtful accounts

   6,208   2.0   5,089   1.7   1,119   22.0 
  

 

 

   

 

 

   

 

 

  

Total operating expenses

   66,193   21.1   69,896   23.5   (3,703  (5.3
  

 

 

   

 

 

   

 

 

  

Operating income

   18,688   6.0   7,542   2.6   11,146   147.8 
  

 

 

   

 

 

   

 

 

  

Interest income

   (50  —     (46  —     (4  8.7 

Interest expense

   3,629   1.2   1,760   0.6   1,869   106.2 
  

 

 

   

 

 

   

 

 

  

Total interest expense, net

   3,579   1.2   1,714   0.6   1,865   108.8 

Other income

   165   0.1   126   —     39   31.0 
  

 

 

   

 

 

   

 

 

  

Income before income taxes

   15,274   4.9   5,954   2.0   9,320   156.5 

Income tax expense

   4,908   1.6   1,498   0.5   3,410   227.6 
  

 

 

   

 

 

   

 

 

  

Net income

  $10,366   3.3  $4,456   1.5  $5,910   132.6 
  

 

 

   

 

 

   

 

 

  

Business Metrics (Actual Numbers, Except Billable Hours in Thousands)

       

Average billable census

   35,176    33,893    1,283   3.8

Billable hours

   17,685    17,154    531   3.1 

Average billable hours per census per month

   55.9    56.2    (0.3  (0.5

Billable hours per business day

   90,692    87,522    3,170   3.6 

Revenues per billable hour

  $17.74   $17.32   $0.42   2.4

 

(1)Average billable census is the number of unique clients receiving a billable service during a period.
(2)Billable hours is the total number of hours provided to clients during a period.

 

 

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Net service revenues from federal, state, local and other governmental programs accounted for 64.8% and 72.0% of net service revenues for the nine months ended September 30, 2017 and 2016, respectively. Managed care organizations accounted for 32.5% and 24.4% of net service revenues for the nine months ended September 30, 2017 and 2016, respectively, with commercial insurance payors and private pay accounting for the remainder of net service revenues. A significant amount of our net service revenues for the nine months ended September 30, 2017 and 2016 were derived from one payor client, the Illinois Department on Aging, which accounted for 36.6% and 43.6% respectively, of our total net service revenues.

Net service revenues increased $16.8 million, or 5.6%, to $313.8 million for the nine months ended September 30, 2017 compared to $297.0 million for the same period in 2016. The increase was primarily due to a 3.8% increase in average billable census and a 2.4% increase in revenues per billable hour in the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016.

Gross margin increased to 27.1% for the nine months ended September 30, 2017, compared to 26.1% for the nine months ended September 30, 2016. This increase was primarily due to a $2.8 million reduction in direct service costs associated with salaries and benefits, travel mileage and unbillable errand miles, and our sale of the lower margin three adult day services centers.

General and administrative expenses, expressed as a percentage of net service revenues decreased to 18.2% for the nine months ended September 30, 2017, from 20.1% for the nine months ended September 30, 2016. General and administrative expenses decreased to $57.2 million as compared to $59.9 million for the nine months ended September 30, 2017 and 2016, respectively. The decrease in general and administrative expenses was primarily due to a decrease in severance and restructuring costs in the total amount of $6.7 million and a decrease in telephone expenses of $0.8 million. These decreases were offset by an increase in administrative employee wages, taxes and benefit costs of $4.4 million, an increase in acquisition expenses of $0.6 million and an increase in stock-based compensation of $0.6 million.

Depreciation and amortization expense decreased slightly to $4.8 million for the nine months ended September 30, 2017 as compared to $4.9 million for the nine months ended September 30, 2016. Amortization of intangibles, which are principally amortized using accelerated methods, totaled $3.3 million and $3.6 million for the nine months ended September 30, 2017 and 2016, respectively.

Provision for doubtful accounts increased by $1.1 million to $6.2 million for the nine months ended September 30, 2017 compared to $5.1 million for the same period in 2016. The increase was primarily due to additional reserves needed for certain managed care organizations and the general increase in our overall business.

Interest Income

Illinois law entitles designated service program providers to receive a prompt payment interest penalty based on qualifying services approved for payment that remain unpaid after a designated period of time. As the amount and timing of the receipt of these payments are not certain, the interest income is recognized when received. For the three and nine months ended September 30, 2017 and 2016, we did not receive any prompt payment interest.

Interest Expense

Interest expense increased to $0.9 million from $0.6 million for the three months ended September 30, 2017 as compared to the same period in 2016, primarily due to the higher outstanding term loan balance under our new senior secured credit facility. For the nine months ended September 30, 2017 as compared to September 30, 2016, interest expense increased to $3.6 million from $1.8 million, respectively, primarily due to thewrite-off of the unamortized debt issuance costs in the amount of $1.3 million upon the termination of our Terminated Senior Secured Credit Facility on May 8, 2017, as well as increased interest expense due to the higher outstanding term loan balance under our new senior secured credit facility. See Note 6 to the Notes to Condensed Consolidated Financial Statements (Unaudited) Long-Term Debt for additional information.

Other Income

For the three and nine months ended September 30, 2017, other income of $64,000 and $0.2 million, respectively, consisted of income distributions received from the cost method investments in joint ventures, which were sold on October 1, 2017. For the three and nine months ended September 30, 2016, we recorded other income of 0.1 million. We accounted for this income in accordance with ASC Topic 325, “Investments—Other.” and recognized the net accumulated earnings only to the extent distributed by the joint ventures on the date received.

Income Tax Expense

All of our income is from domestic sources. We incur state and local taxes in states in which we operate. Our federal statutory rate was 35.0% and 34.3% for the three months ended September 30, 2017 and 2016, respectively, and 35.0% and 34.3% for the nine months ended September 30, 2017 and 2016, respectively. The effective income tax rate was 32.2% and 14.6% for the three months ended September, 2017 and 2016, respectively, and 32.1% and 25.2% for the nine months ended September 30, 2017 and 2016, respectively. The difference between our federal statutory and effective income tax rates are principally due to the inclusion of state taxes and the use of federal employment tax credits that lower our effective tax rate.

 

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Liquidity and Capital Resources

Overview

Our primary sources of liquidity are cash from operations and borrowings under our new credit facility. As described below under “Senior Secured Credit Facility”, we entered into a new credit facility on May 8, 2017 that replaced our Terminated Senior Secured Credit Facility (see “—Terminated Senior Secured Credit Facility” below). At September 30, 2017 and December 31, 2016, we had cash balances of $45.7 million and $8.0 million, respectively.

As of September 30, 2017, we had a total of $45.0 million outstanding on our new credit facility. After giving effect to the amount drawn on our new credit facility, approximately $11.9 million of outstanding letters of credit as of September 30, 2017, and borrowing limits based on an advance multiple of adjusted EBITDA, we had $97.9 million available for borrowing under our new credit facility as of September 30, 2017.

As of December 31, 2016, we had a total of $24.1 million outstanding on our Terminated Senior Secured Credit Facility. After giving effect to the amount drawn on the Terminated Senior Secured Credit Facility, approximately $16.7 million of outstanding letters of credit as of December 31, 2016, and borrowing limits based on an advance multiple of adjusted EBITDA, we had $79.7 million available for borrowing under the Terminated Senior Secured Credit Facility as of December 31, 2016.

Cash flows from operating activities represent the inflow of cash from our payor clients and the outflow of cash for payroll and payroll taxes, operating expenses, interest and taxes. Due to its revenue deficiencies as well as budget and financing issues, from time to time the State of Illinois has reimbursed us on a delayed basis with respect to our various agreements including with our largest payor, the Illinois Department on Aging. The open receivable balance from the State of Illinois decreased by $25.7 million from $69.3 million as of December 31, 2016 to $43.6 million as of September 30, 2017.

The State of Illinois’s payments have been delayed in the past and may continue to be delayed in the future due to budget disputes that began in 2015. The State of Illinois did not adopt a comprehensive budget for fiscal year 2016, which ended on June 30, 2016, or a comprehensive budget for fiscal year 2017, which ended on June 30, 2017. On July 6, 2017, the State of Illinois passed a balanced budget for state fiscal year 2018, which began on July 1, 2017. With this budget, the Illinois Department on Aging is authorized to pay for theNon-Medicaid consumers we served in prior fiscal years. In July 2017, we began receiving delayed payments. As of September 30, 2017, we have been paid for substantially all claims from prior state fiscal years.

There remains uncertainty surrounding future year budgets. If future budgets are not enacted timely payments from the State of Illinois could be delayed in the future. The delays could adversely impact our liquidity and result in the need to increase borrowings under our new credit facility or cause us to pursue other liquidity options.

Senior Secured Credit Facility

On May 8, 2017, we entered into a new credit facility and credit agreement (the “Credit Agreement”) with certain lenders and Capital One, N.A., as a lender and swing lender and as agent for all lenders. This new credit facility totals $250.0 million, replaces our Terminated Senior Secured Credit Facility totaling $125.0 million with certain lenders and Fifth Third Bank as agent (“Terminated Senior Secured Credit Facility”, see description below for more details), and terminates our Second Amended and Restated Credit and Guaranty Agreement, dated as of November 10, 2015. The new credit facility includes a $125.0 million revolving loan, a $45.0 million term loan and an $80.0 million delayed draw term loan. The maturity of the new credit facility is five years, although the delayed draw term loan is only available until November 8, 2018. Under the terms of an accordion feature of the Credit Agreement, $100.0 million is also available for incremental term loans. Fundings under the delayed draw term loans and the incremental term loans are limited to financing or refinancing Permitted Acquisitions (as defined in the Credit Agreement). The availability of additional draws under the revolving credit portion of our new credit facility is conditioned, among other things, upon (after giving effect to such draws) the ratio of Consolidated Total Indebtedness (as defined in the Credit Agreement), less subordinated indebtedness, to Consolidated Adjusted EBITDA (as defined in the Credit Agreement) not exceeding 4.25:1.00. In connection with the new credit facility, we incurred $2.8 million of debt issuance costs.

Addus HealthCare, Inc. (“Addus HealthCare”) is the borrower, with its parent, Addus HomeCare Corporation (“Holdings”), and substantially all of Holdings’ subsidiaries as guarantors under the new credit facility. The new credit facility is secured by a first priority security interest in all of our and the other credit parties’ current and future tangible and intangible assets, including the shares of stock of the borrower and subsidiaries.

Interest on our new credit facility may be payable at (x) the sum of (i) an applicable margin ranging from 1.50% to 2.25% based on the applicable senior leverage ratio (provided that the applicable margin will be 1.50% through approximately October 31, 2017) plus (ii) a base rate equal to the greatest of (a) the rate of interest last quoted by The Wall Street Journal as the “prime rate,” (b) the sum of the federal funds rate plus a margin of 0.50% and (c) the sum of the adjusted LIBOR that would be applicable to a loan with an interest period of one month advanced on the applicable day (not to be less than 0.00%) plus a margin of 1.00% or (y) the sum of (i) an applicable margin ranging from 2.50% to 3.25% based on the applicable leverage ratio (provided that the applicable margin will be 2.50% through approximately October 31, 2017) plus (ii) the offered rate per annum for the applicable interest period that appears on Reuters Screen LIBOR01 Page. Swing loans may not be LIBOR loans.

We pay a fee ranging from 0.25% to 0.50% based on the applicable leverage ratio times the unused portion of the revolving portion of the new credit facility (provided that the fee will be 0.25% through approximately October 31, 2017).

In July 2017, we drew a total of $30.0 million on the revolving credit line under the new credit facility primarily to fund the acquisition of Options Home Care. We repaid the balance in August 2017. As of September 30, 2017, we had a total of $45.0 million of term loans outstanding on the new credit facility and the total availability under the revolving credit loan facility was $97.9 million.

The Credit Agreement contains customary affirmative covenants regarding, among other things, the maintenance of records, compliance with laws, maintenance of permits, maintenance of insurance and property and payment of taxes. The Credit Agreement also contains certain customary financial covenants and negative covenants that, among other things, include a requirement to maintain a minimum fixed charge coverage ratio, a requirement to stay below a maximum senior leverage ratio and a requirement to stay below a maximum permitted amount of capital expenditures, as well as restrictions on guarantees, indebtedness, liens, investments and loans, subject to customary carve outs, a restriction on dividends (provided that Addus HealthCare may make distributions to us in an amount that does not exceed $5.0 million in any year absent of an event of default, plus limited exceptions for tax and administrative distributions), a restriction on the ability to consummate acquisitions in amounts exceeding $60.0 million individually and $80.0 million in the aggregate each year (in each case, without the consent of the lenders), restrictions on mergers, dispositions of assets, and affiliate transactions, and restrictions on fundamental changes and lines of business. As of September 30, 2017, we were in compliance with all of our Credit Agreement covenants.

 

 

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Terminated Senior Secured Credit Facility

Prior to May 8, 2017, we were a party to the Terminated Senior Secured Credit Facility with certain lenders and Fifth Third Bank, as agent and letters of credit issuer. The Terminated Senior Secured Credit Facility provided a $100.0 million revolving line of credit, a delayed draw term loan facility of up to $25.0 million and an uncommitted incremental term loan facility of up to $50.0 million, which was to expire on November 10, 2020 and included a $35.0 million sublimit for the issuance of letters of credit. The Terminated Senior Secured Credit Facility increased the specified advance multiple from 3.25 to 3.75 to 1.00 and the maximum permitted senior leverage ratio from 3.50 to 4.00 to 1.00. Except as modified by the May 24, 2016, amendment, the Terminated Senior Secured Credit Facility contained the same material terms as the previous agreement dated November 10, 2015. Substantially all of the subsidiaries of Holdings wereco-borrowers, and Holdings had guaranteed the borrowers’ obligations under the Terminated Senior Secured Credit Facility. The Terminated Senior Secured Credit Facility was secured by a first priority security interest in all of Holdings’ and the borrowers’ then and future tangible and intangible assets, including the shares of stock of the borrowers.

The availability of funds under the revolving credit portion of our Terminated Senior Secured Credit Facility was based on the lesser of (i) the product of adjusted EBITDA, as defined in our terminated credit agreement, for the most recent12-month period for which financial statements had been delivered under the credit agreement multiplied by the specified advance multiple, up to 3.75, less the outstanding senior indebtedness and letters of credit, and (ii) $100.0 million less the outstanding revolving loans and letters of credit. Interest on our Terminated Senior Secured Credit Facility might have been payable at (x) the sum of (i) an applicable margin ranging from 2.00% to 2.50% based on the applicable leverage ratio plus (ii) a base rate equal to the greatest of (a) the rate of interest last quoted by The Wall Street Journal as the “prime rate,” (b) the sum of the federal funds rate plus a margin of 0.50% and (c) the sum of the adjusted LIBOR that would have been applicable to a loan with an interest period of one month advanced on the applicable day plus a margin of 3.00% or (y) the sum of (i) an applicable margin ranging from 3.00% to 3.50% based on the applicable leverage ratio plus (ii) the adjusted LIBOR that would have been applicable to a loan with an interest period of one, two or three months advanced on the applicable day or (z) the sum of (i) an applicable margin ranging from 3.00% to 3.50% based on the applicable leverage ratio plus (ii) the daily floating LIBOR that would have been applicable to a loan with an interest period of one month advanced on the applicable day. We paid a fee ranging from 0.25% to 0.50% per annum based on the applicable leverage ratio times the unused portion of the revolving portion of the Terminated Senior Secured Credit Facility. Issuedstand-by letters of credit were charged at a rate equal to the applicable margin for LIBOR loans payable quarterly.

On May 8, 2017, we repaid the outstanding debt balance of $23.8 million together with accrued interest of $0.1 million and terminated the Terminated Senior Secured Credit Facility. In connection with the termination, we wrote off the unamortized debt issuance costs under the Terminated Senior Secured Credit Facility in the amount of $1.3 million, which was included in interest expense on our Unaudited Condensed Consolidated Statements of Income.

For the period January 1, 2017 through May 7, 2017, we drew and subsequently repaid $20.0 million of our revolving credit line to fund operations. As of December 31, 2016, we had a total of $24.1 million outstanding on the Terminated Senior Secured Credit Facility and the total availability under the revolving credit loan facility was $79.7 million.

If we do not have sufficient cash resources or availability under our Credit Agreement, or we are otherwise prohibited from making acquisitions under the terms of our Credit Agreement, our growth, including our ability to grow through acquisitions, could be limited unless we obtain additional equity or debt financing or the necessary consents from our lenders under our Credit Agreement. We believe the available borrowings under our Credit Agreement, combined with cash from operations, will be sufficient to cover our working capital needs for at least the next 12 months.

Cash Flows

The following table summarizes changes in our cash flows for the nine months ended September 30, 2017 and 2016:

 

   For the Nine Months Ended September 30, 
   2017   2016 
   (Amounts in Thousands) 

Net cash provided by operating activities

  $42,578   $30,991 

Net cash used in investing activities

   (23,108   (21,617

Net cash provided by financing activities

   18,205    25,968 

Nine Months Ended September 30, 2017 Compared to Nine Months Ended September 30, 2016

Net cash provided by operating activities was $42.6 million for the nine months ended September 30, 2017, compared to cash provided by operating activities of $31.0 million for the same period in 2016. This increase in cash provided by operations was primarily due to significant receipts on accounts receivable from the State of Illinois for our services provided through June 30, 2017 under its balanced budget passed on July 6, 2017.

Net cash used in investing activities was $23.1 million for the nine months ended September 30, 2017 compared to cash used in investing activities of $21.6 million for the nine months ended September 30, 2016. Our investing activities for the nine months ended September 30, 2017 consisted of $2.4 million in proceeds from the sale of three adult day services centers, $22.4 million for the acquisition of Options Home Care, net of cash acquired, and $3.1 million in purchases of property and equipment primarily related to new office space and investments in our technology infrastructure. Our investing activities for the nine months ended September 30, 2016 consisted of $20.4 million for the acquisition of South Shore Home Health Services, Inc. (“South Shore”) and certain of its affiliated entities (collectively, the “South Shore Acquisition”) completed on February 5, 2016 and $1.2 million in purchases of property and equipment related to new office space, investment in our technology infrastructure and vehicles for adult day centers.

Net cash provided by financing activities was $18.2 million for the nine months ended September 30, 2017 as compared to net cash provided by financing activities of $26.0 million for the nine months ended September 30, 2016. Our financing activities for the nine months ended September 30, 2017 were borrowings of $45.0 million on the term loan portion of our new senior secured credit facility, $30.0 million in draws and subsequent repayments on the revolver portion of our new senior secured credit facility, $20.0 million in draws and subsequent repayments on the revolver portion of our Terminated Senior Secured Credit Facility, $24.1 million of payments on the term loan portion of our Terminated Senior Secured Credit Facility, $1.2 million in cash received from exercise of stock options, $2.8 million payment for debt issuance costs under our new senior secured credit facility, and $1.1 million of payments on capital lease obligations. Our financing activities for the nine months ended September 30, 2016 were $52.0 million in draws on our Terminated Senior Secured Credit Facility to fund operations and the South Shore Acquisition, a full repayment of the revolving portion of our Terminated Senior Secured Credit Facility in the amount of $27.0 million, $3.0 million of cash received for the exercise of employee stock options, $0.8 million of payments on capital lease obligations, $0.6 million payments on the term loan portion of our Terminated Senior Secured Credit Facility, $0.5 million payment for debt issuance costs and a $0.1 million payment for the contingentearn-out obligation related to our December 1, 2013 acquisition of Coordinated Home Health Care, LLC.

 

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Outstanding Accounts Receivable

Gross accounts receivable as of September 30, 2017 and December 31, 2016 were approximately $106.7 million and $124.4 million, respectively. Outstanding accounts receivable, net of the allowance for doubtful accounts, decreased by $20.7 million as of September 30, 2017 as compared to December 31, 2016. The decrease in net accounts receivable was primarily due to significant receipts on accounts receivable from the State of Illinois for our services provided through June 30, 2017 under its balanced budget passed on July 6, 2017.

We establish our allowance for doubtful accounts to the extent it is probable that a portion or all of a particular account will not be collected. We establish our provision for doubtful accounts primarily by analyzing historical trends and the aging of receivables. In our evaluation, we consider other factors including: delays in payment trends in individual states due to budget or funding issues; billing conversions related to acquisitions or internal systems; resubmission of bills with required documentation and disputes with specific payors. An allowance for doubtful accounts is maintained at a level that our management believes is sufficient to cover potential losses. However, actual collections could differ from our estimates.

Our collection procedures include review of account aging and direct contact with our payors. We have historically not used collection agencies. An uncollectible amount is written off to the allowance account after reasonable collection efforts have been exhausted.

The following tables detail our accounts receivable before reserves by payor category, showing Illinois governmental payors separately, and the related allowance amount at September 30, 2017 and December 31, 2016:

 

   September 30, 2017 
   0-90 Days  91-180 Days  181-365 Days  Over 365 Days  Total 
   (Amounts in Thousands, Except Percentages) 

Illinois governmental based programs

  $29,939  $7,541  $798  $5,306  $43,584 

Other state, local and other governmental programs

   15,651   2,095   2,597   3,183   23,526 

Managed care organizations

   24,297   5,315   3,781   4,704   38,097 

Private pay and commercial insurance

   526   540   447   (24  1,489 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  $70,413  $15,491  $7,623  $13,169  $106,696 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Aging % of total

   66.0  14.5  7.1  12.3 

Allowance for doubtful accounts

      $10,361 

Reserve as % of gross accounts receivable

       9.7

 

   December 31, 2016 
   0-90 Days  91-180 Days  181-365 Days  Over 365 Days  Total 
   (Amounts in Thousands, Except Percentages) 

Illinois governmental based programs

  $40,727  $25,619  $1,418  $1,585  $69,349 

Other state, local and other governmental programs

   14,039   3,341   2,848   2,679   22,907 

Managed care organizations

   20,786   3,090   2,117   3,002   28,995 

Private pay and commercial insurance

   2,439   399   265   8   3,111 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Total

  $77,991  $32,449  $6,648  $7,274  $124,362 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Aging % of total

   62.8  26.1  5.3  5.8 

Allowance for doubtful accounts

      $7,363 

Reserve as % of gross accounts receivable

       5.9

We calculate our days sales outstanding (“DSO”) by taking the accounts receivable outstanding net of the allowance for doubtful accounts divided by the total net service revenues for the last quarter, multiplied by the number of days in that quarter. Our DSOs were 82 days and 104 days at September 30, 2017 and December 31, 2016, respectively. The DSOs for our largest payor, the Illinois Department on Aging, at September 30, 2017 and December 31, 2016 were 90 days and 152 days, respectively. We may not receive payments on a consistent basis in the near term and our DSOs and the DSO for the Illinois Department on Aging may increase despite the State of Illinois’s enactment of a fiscal year 2018 budget on July 6, 2017. The increase in the reserve as a percentage of gross accounts receivable to 9.7% as of September 30, 2017 from 5.9% as of December 31, 2016 was attributable to additional reserves needed for managed care organizations and acquisition transitions.

Off-Balance Sheet Arrangements

As of September 30, 2017, we did not have anyoff-balance sheet guarantees or arrangements with unconsolidated entities.

 

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Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based on our Condensed Consolidated Financial Statements (Unaudited) prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). The preparation of the financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expense and related disclosures. We base our estimates and judgments on historical experience and other sources and factors that we believe to be reasonable under the circumstances; however, actual results may differ from these estimates. We consider the items discussed below to be critical because of their impact on operations and their application requires our judgment and estimates.

Revenue Recognition

The majority of our revenues for the three and nine months ended September 30, 2017 and 2016 were derived from Medicaid and Medicaid waiver programs under agreements with various state and local authorities. These agreements provide for a service term from one year to an indefinite term. Services are provided based on authorized hours, determined by the relevant state or local agency, at an hourly rate specified in the agreement or fixed by legislation and recognized in net service revenues as services are provided. Services to other payors, such as managed care organizations and commercial insurance or private clients, are provided at negotiated hourly rates and recognized in net service revenues as services are provided. We provide for appropriate allowances for uncollectible amounts at the time the services are rendered.

Accounts Receivable and Allowance for Doubtful Accounts

We are paid for our services primarily by state and local agencies under Medicaid or Medicaid waiver programs, managed care organizations, commercial insurance companies and private consumers. While our accounts receivable are uncollateralized, our credit risk is somewhat limited due to the significance of governmental payors to our results of operations. Laws and regulations governing the governmental programs in which we participate are complex and subject to interpretation. Amounts collected may be different than amounts billed due to client eligibility issues, insufficient or incomplete documentation, services at levels other than authorized and other reasons unrelated to credit risk.

Illinois law entitles designated service program providers to receive a prompt payment interest penalty based on qualifying services approved for payment that remain unpaid after a designated period of time. As the amount and timing of the receipt of these payments are not certain, the interest income is recognized when received and reported in the income statement caption, interest income. We did not receive any prompt payment interest for the three and nine months ended September 30, 2017 and 2016.

We establish our allowance for doubtful accounts to the extent it is probable that a portion or all of a particular account will not be collected. We establish our provision for doubtful accounts primarily by analyzing historical trends and the aging of receivables. In our evaluation, we consider other factors including: delays in payment trends in individual states due to budget or funding issues; billing conversions related to acquisitions or internal systems; resubmission of bills with required documentation and disputes with specific payors. An allowance for doubtful accounts is maintained at a level that our management believes is sufficient to cover potential losses. However, actual collections could differ from our estimates.

Goodwill

Our carrying value of goodwill is the residual of the purchase price over the fair value of the net assets acquired from various acquisitions including the acquisition of Addus HealthCare. In accordance with ASC Topic 350, “Goodwill and Other Intangible Assets,” goodwill and intangible assets with indefinite useful lives are not amortized. We test goodwill for impairment at the reporting unit level on an annual basis, as of October 1, or whenever potential impairment triggers occur, such as a significant change in business climate or regulatory changes that would indicate that an impairment may have occurred. We may use a qualitative test, known as “Step 0,” or atwo-step quantitative method to determine whether impairment has occurred. We can elect to perform Step 0, an optional qualitative analysis, and based on the results skip the remaining two steps. In 2016, we elected to implement Step 0, and we were not required to conduct the remaining two steps. The results of our Step 0 assessment indicated that it was more likely than not that the fair value of our reporting unit exceeded its carrying value and therefore we concluded that there were no impairments for the year ended December 31, 2016. No impairment charges were recorded for the three and nine months ended September 30, 2017 or 2016.

Intangible Assets

We review our finite lived intangibles for impairment whenever changes in circumstances indicate that the carrying amount of an asset may not be recoverable. To determine if impairment exists, we compare the estimated future undiscounted cash flows from the related long-lived assets to the net carrying amount of such assets. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the estimated fair value of the asset, generally determined by discounting the estimated future cash flows. No impairment charges were recorded for the year ended December 31, 2016 or the three and nine months ended September 30, 2017 or 2016.

We also have indefinite-lived assets that are not subject to amortization expense such as licenses and in certain states certificates of need to conduct specific operations within geographic markets. Our management has concluded that these assets have indefinite lives, as management has determined that there are no legal, regulatory, contractual, economic or other factors that would limit the useful life of these intangible assets and we intend to renew the licenses indefinitely. The licenses and certificates of need are tested annually for impairment, or whenever potential impairment triggers occur. No impairment charges were recorded for the year ended December 31, 2016 or the three and nine months ended September 30, 2017 or 2016.

Workers’ Compensation Program

Our workers’ compensation insurance program has a $0.4 million deductible component. We recognize our obligations associated with this program in the period the claim is incurred. The cost of both the claims reported and claims incurred but not reported, up to the deductible, have been accrued based on historical claims experience, industry statistics and an actuarial analysis performed by an independent third party. We monitor our claims quarterly and adjust our reserves accordingly. These costs are recorded primarily as the cost of services in the Unaudited Condensed Consolidated Statements of Income. As of September 30, 2017 and December 31, 2016, we recorded $0.6 million and $0.7 million, respectively, in workers’ compensation insurance recovery receivables and a corresponding increase in workers’ compensation liability. The workers’ compensation insurance recovery receivable is included in our prepaid expenses and other current assets on the Unaudited Condensed Consolidated Balance Sheets.

Interest Income

Illinois law entitles designated service program providers to receive a prompt payment interest penalty based on qualifying services approved for payment that remain unpaid after a designated period of time. As the amount and timing of the receipt of these payments are not certain, the interest income is recognized when received.

For the three and nine months ended September 30, 2017 and 2016, we did not receive any prompt payment interest.

 

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Income Taxes

We account for income taxes under the provisions of ASC Topic 740, “Income Taxes.” The objective of accounting for income taxes is to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns. Deferred taxes, resulting from differences between the financial and tax basis of our assets and liabilities, are also adjusted for changes in tax rates and tax laws when changes are enacted. ASC Topic 740 also requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized. ASC Topic 740 also prescribes a recognition threshold and measurement process for recording in the financial statements uncertain tax positions taken or expected to be taken in a tax return. In addition, ASC Topic 740 provides guidance on derecognition, classification, accounting in interim periods and disclosure requirements for uncertain tax positions.

Stock-based Compensation

We currently have two active stock incentive plans, the 2009 Stock Incentive Plan, as amended and restated (the “2009 Plan”) and the 2017 Omnibus Incentive Plan (the “2017 Plan”, and together with the 2009 Plan, the “Plans”), that provide for stock-based employee compensation. We account for stock-based compensation in accordance with ASC Topic 718, “Stock Compensation.” Compensation expense is recognized on a straight-line basis under the Plans over the vesting period of the equity awards based on the grant date fair value of the options and restricted stock awards. From October 28, 2009 to December 31, 2016, we utilized the Enhanced Hull-White Trinomial Model to value our options. Beginning January 1, 2017, we began utilizing the Black-Scholes Option Pricing Model to value our options, as we believe it is a more widely accepted and understood valuation model. The determination of the fair value of stock-based payments utilizing the Black-Scholes Model and the Enhanced Hull-White Trinomial Model is affected by our stock price and a number of assumptions, including expected volatility, risk-free interest rate, expected term, expected dividends yield, expected forfeiture rate, expected turn-over rate and the expected exercise multiple.

New Accounting Pronouncements

In May 2014, the FASB issued ASU2014-09, “Revenue from Contracts with Customers (Topic 606),” which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.ASU 2014-09 will replace most existing revenue recognition guidance in GAAP and will be effective for us as of January 1, 2018. The standard permits the use of either the retrospective or modified retrospective (cumulative effect) transition method and we have selected the modified retrospective approach. The FASB has issued and may issue in the future, interpretative guidance, which may cause our evaluation to change. We have completed the initial review to determine the impact ASU2014-09 and its subsequent updates will have on our Consolidated Financial Statements or financial statement disclosures upon adoption. Based on our continued review of contracts and revenue streams, we believe that the timing and measurement of revenue for our customers will be similar to our current revenue recognition model due to the structure of payor contracts which consists of a fixed reimbursement rate that is deemed earned upon completion of a defined service. In addition, we have made ongoing progress around process changes and system enhancements to ensure adherence to the new standard. During the third quarter of 2017, additional resources were retained to assist in the completion of the assessment, prepare specific contract analysis and document policy changes. The Company expects that the final evaluation of the impact and implementation of system enhancements will be completed during the fourth quarter of 2017.

In February 2016, the FASB issued ASU2016-02, “Leases (Topic 842),” which replaces existing leasing rules with a comprehensive lease measurement and recognition standard and expanded disclosure requirements. ASU2016-02 will require lessees to recognize most leases on their balance sheets as liabilities, with corresponding“right-of-use” assets and is effective for annual reporting periods beginning after December 15, 2018, subject to early adoption. For income statement recognition purposes, leases will be classified as either a finance or an operating lease. We will be required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. Upon initial evaluation, we believe that the new standard will have a material impact on our Consolidated Balance Sheets but it will not affect our liquidity. It has been determined that we will need to secure new software to account for the change in accounting for leases and are currently reviewing the software options available.

In June 2016, the FASB issued ASU2016-13, “Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.” ASU2016-13 changes the impairment model for most financial assets and certain other instruments. Under the new standard, entities holding financial assets, including accounts receivables and net investment in leases that are not accounted for at fair value through net income are to be presented at the net amount expected to be collected. An allowance for credit losses will be a valuation account that will be deducted from the amortized cost basis of the financial asset to present the net carrying value at the amount expected to be collected on the financial asset. ASU2016-13 is effective as of January 1, 2020. Early adoption is permitted. We are currently evaluating the impact of ASU2016-13.

In August 2016, the FASB issued ASU2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.” This standard amends and adjusts how cash receipts and cash payments are presented and classified in the statement of cash flows. ASU2016-15 is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, and will require adoption on a retrospective basis unless impracticable. If impracticable we would be required to apply the amendments prospectively as of the earliest date possible. We are currently evaluating the impact that ASU2016-15 will have on our statement of cash flows but do not expect it to have a material impact.

In January 2017, the FASB issued ASU2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.” The new guidance eliminates the requirement to calculate the implied fair value of goodwill (i.e., Step 2 of the current goodwill impairment test) to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value (i.e., measure the charge based on the current Step 1). ASU2017-04 is effective for annual and any interim impairment tests for periods beginning after December 15, 2019. We are currently evaluating the provisions of ASU2017-04 to determine how our goodwill impairment testing will be impacted and whether we may elect to adopt ASU2017-04 prior to the stated effective date.

In May 2017, the FASB issued ASU2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting.” ASU2017-19 clarifies when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. This pronouncement is effective for annual periods, and for interim periods within those annual periods, beginning after December 15, 2017, with early adoption permitted, and is applied prospectively to changes in terms or conditions of awards occurring on or after the adoption date. We are evaluating the impact of the adoption of this guidance on our financial statements but do not expect it to have a material impact.

 

ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk associated with changes in interest rates on our variable rate long-term debt. As of September 30, 2017, we had outstanding borrowings of $45.0 million on our new credit facility, all of which was subject to variable interest rates. If the variable rates on this debt were 100 basis points higher than the rate applicable to the borrowing during the three and nine month period ended September 30, 2017, our net income would have decreased by $0.1 million, or $0.01 per diluted share, and $0.3 million, or $0.03 per diluted share, for the respective periods. We do not currently have any derivative or hedging arrangements, or other known exposures, to changes in interest rates.

 

ITEM 4.CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and our Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2017. The term “disclosure controls and procedures,” as defined in Rules13a-15(e) and15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), means controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on the evaluation of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2017.

Changes in Internal Control Over Financial Reporting

We continue to integrate application changes and acquisitions processes into our established internal control environment to effectively manage risk to the company and financial reporting efforts.

Except as mentioned above, there were no changes in our internal control over financial reporting identified in connection with the evaluation required by Rule13a-15(d) and15d-15(d) of the Exchange Act that occurred during the three months ended September 30, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

Item 1.Legal Proceedings

Legal Proceedings

From time to time, we are subject to legal and/or administrative proceedings incidental to our business. It is the opinion of management that the outcome of pending legal and/or administrative proceedings will not have a material effect on our financial position and results of operations.

On January 20, 2016, we were served with a lawsuit that was filed in the United States District Court for the Northern District of Illinois against us and Cigna Corporation by Stop Illinois Marketing Fraud, LLC, a qui tam relator formed for the purpose of bringing this action. In the action, the plaintiff alleges, inter alia, violations of the federal False Claims Act relating primarily to allegations of violations of the federal Anti-Kickback Statute and allegedly improper referrals of patients from our home care division to our home health business, substantially all of which was sold in 2013. The plaintiff seeks to recover damages, fees and costs under the federal False Claims Act including treble damages, civil penalties and its attorneys’ fees. The U.S. government has declined to intervene at this time. Plaintiff amended its complaint on April 4, 2016 to include additional allegations in support of its False Claims Act claims, including alleged violations of the federal Anti-Kickback Statute. Our reply in further support of the motion to dismiss was filed on August 23, 2016. On February 3, 2017, the Court granted Cigna Corporation’s motion to dismiss in full, and granted our motion to dismiss in part allowing Plaintiff another chance to amend its complaint. Plaintiff timely filed a second amended complaint on March 10, 2017, withdrawing its conspiracy claim under the Federal False Claims Act and adding an explicit claim under the Illinois False Claims Act for the same underlying kickback allegations. On April 7, 2017, we filed a partial motion to dismiss the Second Amended Complaint, which has not yet been ruled on by the court. On May 24, 2017, the State of Illinois filed notice that it was declining to intervene in the plaintiff’s claim under the Illinois False Claims Act. We intend to continue to defend the litigation vigorously and believe the case will not have a material adverse effect on our business, financial condition or results of operations.

On May 4, 2016, Addus HealthCare, together with 59 other social service and healthcare providers in the State of Illinois, filed an action in the Circuit Court of Cook County, Illinois against certain individuals in their official capacities as agents of the Illinois Department of Human Services, the Illinois Department on Aging, the Illinois Department of Public Health, the Illinois Department of HealthCare and Family Services, the Illinois Criminal Justice Information Authority, the Illinois Department of Corrections and the Illinois Department of Central Management Services, including the Governor of Illinois. On July 20, 2016, a third amended complaint was filed by the plaintiffs, who now comprise 97 similarly situated providers and provider organizations. In the action, the plaintiffs, including Addus HealthCare, allege to have entered into contracts with the various defendants based in part on the Governor’s proposed budget, which provided for funding for the services to be provided by plaintiffs thereunder. The Governor subsequently vetoed all of the relevant appropriations bills on June 25, 2015, and again vetoed an appropriations bill that included funding for the contracts on June 10, 2016. While the defendant officer and agency heads have continued to enforce such contracts, since August 1, 2016, we received an aggregate of approximately $65.4 million in payments from the State of Illinois from the stopgap budget enacted on June 30, 2016. In those actions, plaintiffs alleged the defendant officers and agency heads acted beyond the scope of their legal authority in entering into and enforcing contracts with no intent to perform under such contracts by failing to pay amounts due thereunder when due. The action also alleged that the Governor of Illinois’ veto of appropriations for such contracts violated the Illinois Constitution. Plaintiffs sought injunctive relief to require payment of overdue bills to prevent irreparable harm, including imperiling the State of Illinois’s infrastructure for delivery of human services. On August 31, 2016, the Circuit Court denied plaintiffs’ petitions for declaratory and injunctive relief and dismissed the actions with prejudice. Plaintiffs timely filed a notice of appeal on September 30, 2016, and on June 15, 2017, the Appellate Court of Illinois affirmed the Circuit Court’s dismissal of the plaintiffs’ third amended complaint. The plaintiffs elected not to pursue any further appeals, and in July 2017, we began receiving delayed payments from the State of Illinois for services provided in prior state fiscal years. As of September 30, 2017, with the exception of normal levels of disputed claims, we have been paid for all claims from prior state fiscal years.

 

Item 1A.Risk Factors

Investing in our common stock involves a high degree of risk. In addition to the other information set forth in this quarterly report on Form10-Q, you should carefully consider the risk factors discussed under the caption “Risk Factors” set forth in Part I, Item 1A, of our Annual Report on Form10-K for the year ended December 31, 2016. There have been no material changes to the risk factors previously disclosed under the caption “Risk Factors” in our Annual Report on Form10-K. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or operating results.

 

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3.Defaults Upon Senior Securities

None.

 

Item 4.Mine Safety Disclosures

None.

 

Item 5.Other Information

None.

 

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Item 6.Exhibits

 

3.1  Amended and Restated Certificate of Incorporation of the Company dated as of October  27, 2009 (filed on November 20, 2009 as Exhibit 3.1 to the Company’s Quarterly Report on Form10-Q (FileNo.  001-34504) and incorporated by reference herein)
3.2  Amended and Restated Bylaws of the Company, as amended by the First Amendment to the Amended and Restated Bylaws (filed on May 9, 2013 as Exhibit 3.2 to the Company’s Quarterly Report on Form10-Q (FileNo. 001-34504) and incorporated by reference herein)
4.1  Form of Common Stock Certificate (filed on October  2, 2009 as Exhibit 4.1 to Amendment No. 4 to the Company’s Registration Statement on FormS-1 (FileNo. 333-160634) and incorporated by reference herein)
4.2  Registration Rights Agreement, dated September  19, 2006, by and among Addus HomeCare Corporation, Eos Capital Partners III, L.P., Eos Partners SBIC III, L.P., Freeport Loan Fund LLC, W. Andrew Wright, III, Addus Term Trust, W. Andrew Wright Grantor Retained Annuity Trust, Mark S. Heaney, James A. Wright and Courtney E. Panzer (filed on July 17, 2009 as Exhibit 4.2 to Addus HomeCare Corporation’s Registration Statement on FormS-1 (FileNo. 333-160634) and incorporated by reference herein)
10.1  Transition Agreement and Release, effective as of August  14, 2017, by and between Addus HealthCare, Inc. and Brenda Belger (filed on July 31, 2017 as Exhibit 10.1 to Addus HomeCare Corporation’s Current Report on Form8-K (FileNo. 001-34504) and incorporated by reference herein)+
10.2  Employmentand Non-Competition  Agreement, effective as of August 14, 2017, by and between Addus HealthCare, Inc. and Laurie Manning (filed on July  31, 2017 as Exhibit 10.2 to Addus HomeCare Corporation’s Current Report on Form8-K (FileNo. 001-34504) and incorporated by reference herein)+
31.1  Certification of Chief Executive Officer Pursuant to Rule13a-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2  Certification of Chief Financial Officer Pursuant to Rule13a-14(a) of the Securities Exchange Act of 1934 as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1  Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section  906 of the Sarbanes-Oxley Act of 2002**
32.2  Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section  906 of the Sarbanes-Oxley Act of 2002**
101  Financial statements from the quarterly report on Form10-Q of Addus HomeCare Corporation for the quarter ended September 30, 2017, filed on November 7, 2017 formatted in XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Income, (iii) Condensed Consolidated Statements of Stockholders’ Equity, (iv) Condensed Consolidated Statements of Cash Flows, and (v) the Notes to Condensed Consolidated Financial Statements*

 

*Filed herewith
**Furnished herewith
+Indicates a management contract or compensation plan or arrangement.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  ADDUS HOMECARE CORPORATION
Date: November 7, 2017 By: 

/S/ R. DIRK ALLISON

  

R. Dirk Allison

President and Chief Executive Officer

(As Principal Executive Officer)

Date: November 7, 2017 By: 

/S/ BRIAN POFF

  

Brian Poff

Chief Financial Officer

(As Principal Financial Officer)

 

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