Dirk Allison - President & CEO Brian Poff - CFO.

Whit Mayo - Robert W. Baird Mitra Ramgopal - Sidoti Dana Hambly - Stephens.

Good morning, and welcome to the Addus HomeCare Corporation first quarter 2017 earnings conference call. Today's call is being recorded.

To the extent any non-GAAP financial measures discussed on today's call, you will also find a reconciliation of that measure to the most directly comparable financial measure calculated according to GAAP by going to the company's website and reviewing yesterday's news release.

This conference call may also contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements, among others, regarding Addus' expected quarterly and financial -- annual financial performance for 2017 or beyond.

For this purpose, any statements made during this call that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, discussions of forecasts, estimates, targets, plans, beliefs, expectations and the like are intended to identify forward-looking statements.

You're hereby cautioned that these statements may be affected by important factors, among others, set forth in Addus' filings with the Securities and Exchange Commission and in its first quarter news release. Consequently, actual operations and results may differ materially from the results discussed in the forward-looking statements.

The company undertakes no obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise. I would now like to turn the call over to the company's President and Chief Executive Officer, Mr. Dirk Allison. Please go ahead, sir..

service, integrity, respect, commitment and leadership. These values are simple yet reflect the qualities we feel are important to our culture. These changes have been exciting for our company and are embraced by our management and employees as we look to the future.

Yesterday afternoon, we announced that we closed on a new bank package, which was led by Capital One. We are excited to be working with a number of partner banks that are part of this new credit facility.

This new facility increases our revolving line of credit to $125 million, with another $125 million of long-term debt of which we have drawn $45 million. As we have previously discussed, Addus has to maintain an increased level of unused line of credit to handle the extended time it takes for the state of Illinois to pay for services we provide.

This increase in our credit facility allows us to operate with the slow Illinois payment history while, at the same time, making sure we have the financing to enable us to grow through strategic acquisitions. We appreciate all of the banks that are part of this new credit facility and look forward to working with them.

As it relates to the state of Illinois, during the first quarter of 2017, the state made great progress on our Medicaid receivables. In the first quarter, we received over $40 million from the state for Medicaid payments. We are grateful to Comptroller Mendoza for her efforts in this regard.

While the state was able to make progress with Medicaid receivables, the state does not have a budget which would allow them to pay for the state-based CCP program.

While we are not certain a budget will be negotiated between the governor and the legislature, we currently believe that there will be an appropriations passed sometime this summer to pay outstanding GRF invoices, as was done last year.

In fact, the legislature has already begun discussions concerning a stopgap appropriation to bring providers like Addus more current. As we have done over the past three quarters, I would like to bring you up-to-date on the status of our ADP conversion.

This has been a detailed and time-consuming conversion due to both the size of our workforce as well as the importance of payroll to our revenue generation. Over the past 12 months, our team has worked tirelessly to make sure we had both the proper process and detailed payrolls that are also -- that are so critical to such a diverse workforce.

We have just recently begun the detailed quality testing that is so important to ensure this conversion occurs with minimal disruption to our employees. In addition, we have spent many hours toward our efforts to verify that controls for this system meet our needs as it relates to our Sarbanes-Oxley requirements.

While we are not yet done with testing, I can tell you that so far the progress has gone very well. As we stand today, we expect to convert the payroll process of our company on July 1.

Once this project is complete, we look forward to reduced payroll issues with our employees, enhanced management information, reduced costs and having a payroll system which is better able to handle acquisition growth. Now let me discuss the financial results for the first quarter of 2017.

Revenues for the first quarter were $101.6 million compared to $92.6 million for the same period in 2016, an increase of 9.7%, with same-store revenue growth of 4.1%. Our earnings per share was $0.37 as compared to $0.01 for the first quarter of 2016.

And adjusted earnings per share for the first quarter of 2017 was $0.34 compared to $0.28 in the same period in 2016, an increase of 21.4%. Our adjusted EBITDA for the first quarter of 2017 increased 19.8% to $8 million from $6.7 million in the first quarter of 2016.

As previously mentioned, our cash collections from the state of Illinois for Medicaid services increased significantly as compared to our fourth quarter of 2016. Our team has done a very good job working with other states and our MCO partners to increase our cash flows from their business.

This allowed us to end the first quarter of 2017 with no outstanding balance on our line of credit. As part of our strategy, we have stated that we expect at least 6% revenue growth to come from acquisitions, and we are comfortable with this expectation.

We took an important step toward achieving the growth -- this growth with our announcement last Thursday of a definitive agreement to acquire Options Home Care, a personal care services company in New Mexico. Options Home Care serves more than 20 counties in the state and produces annual revenues of over $20 million.

We believe Options Home Care will be a strong addition to Addus, and we expect the transaction to close in the third quarter subject to customary closing conditions. We continue to be active with a pipeline of potential acquisitions, although we have walked away from a few deals, two issues we identified during our review process.

To strengthen our overall acquisition program, we hired an experienced acquisition professional during the first quarter as our Vice President of Acquisitions, and that person has already contributed to our efforts in the Options Home Care transaction.

Before I turn this call over to Brian for a more detailed review of our first quarter performance, let me say how exciting it is to be a part of Addus.

We provide an important and a much-needed service to our consumers at a low cost, which enables them to stay in their homes, avoiding the need for much more expensive health care in a less satisfactory venue. With that, let me turn the call over to Brian..

a gain of $0.11 on the sale of our remaining three adult day service centers, which Dirk referenced; severance and other costs of $0.05; non-cash stock-based compensation of $0.02; and M&A and transaction expenses of $0.01.

Our adjusted per share results for the first quarter of 2016 excluded severance and other costs of $0.13, restructuring charges of $0.08, M&A transaction expenses of $0.04 and non-cash stock-based compensation of $0.02.

Our gross margin for the first quarter improved 60 basis points to 26.9% from 26.3% for the prior year first quarter, primarily due to efficiencies in travel and mileage costs. G&A expense for the first quarter of 2017 improved to 20.6% of revenue compared with 24% for the first quarter last year.

Both of these percentages include severance costs, and the first quarter last year also had restructuring charges of $1.3 million.

Nevertheless, we continued to benefit during the quarter from the process improvement and cost reduction initiatives we launched last year, offset in part by higher-than-normal bad debt at 2% of revenues, primarily related to the ongoing transition to managed care in Illinois as well as aging accounts receivable from prior acquisitions.

Our reimbursement, managed care and operational teams are all working together diligently with the respective payers to aid in their processes and streamline our cash flows to allow a return to our historical range.

The company's tax rate for the latest quarter was 33.2% compared with 32.9% for the first quarter of 2016, with the increase primarily due to the higher pretax income as a result of the gain on sale of the adult day care centers. Our net cash provided by operations was $9.6 million for the first quarter.

And we had $19.2 million in cash at the quarter's end, with no outstanding debt on our revolver. Our DSOs remained relatively flat at 103 days compared to 104 days for the fourth quarter, with DSOs for the Illinois Department of Aging down slightly at 148 days.

With the expansion of our credit facility, we are well positioned to execute on our growth strategy while keeping additional liquidity available for Illinois.

In addition to the expansion on our revolver to $125 million, our leverage ratio increased to 4.25x on pricing that has a minimum of 25 basis points improvement from our prior facility dependent on the leverage tier.

Our initial draw on the term loan of $45 million will refinance our existing term loan of just over $23 million from the South Shore acquisition and add cash to the balance sheet to fund the Options acquisition in August.

While we have stated previously that our expectation on acquisitions was 5x to 6x, we did pay a premium of just over 7x at $23.2 million for Options due to the strategic nature of the opportunity as we are now the solid number 1 provider of personal care services in the state.

As this was the sale of a division of a parent company, we do not expect to achieve significant synergies but rather some efficiencies in markets where we had an overlapping footprint. Our team is already working on the integration, and we are looking forward to bringing them into the Addus family. This concludes our prepared comments this morning.

Thank you for being with us. I will now ask the operator to please open the line for your questions..

[Operator Instructions] And our first question comes from Whit Mayo from Robert Baird..

Hey, thanks.

Dirk, maybe just first, any background you can provide on the acquisition of Options? I heard the prepared comments, but was this a shop deal? Was this something that you sourced? So maybe if you can just expand more on the strategic rationale and how this fits into what you're doing in New Mexico, which is a pretty heavy managed care state, if I recall..

Yes, Whit. When we had the opportunity to work with the ownership of Options to acquire that division of their company, we had the ability to keep it out of a process, which we felt was very important.

As we've looked at the strategic states for growth, we've been out telling our investors that New Mexico is one of the states where we felt like there was a great opportunity. It is a state that we do very well on from a business standpoint, and it was an area where we worked very well with the managed care providers in the state.

So when we had the opportunity to work with Options, it made a lot of sense from what we're looking to do as a company to acquire that -- to acquire Options. So if you think about it, what we've always said is we really want to be very strong in the states in which we operate as opposed to being just in a state.

And this allowed us to consolidate into New Mexico. It gave us coverage in Santa Fe that we didn't have before. So it was an opportunity for us as a company to really strengthen an area that does very well..

In terms of the margin profile, anything you can share? And then are they on ADP at this point, or will you transition them onto that through the integration?.

Yes. They are not on ADP today. They're on a different system. One of the reasons we're anticipating a close around August 1 is that we will be converting our company to ADP on the 1st of July. And because it's a division of a company we're buying, we needed to make sure that on day 1, when we had them, they came over on to our systems.

So on August 1, they will come over on ADP and McKesson and will be entirely converted into the Addus way of doing business. And then talk about the margin profile, so you alluded to that, they do have a little higher margin profile than some you might have seen, which is why, as Brian stated, our price was around $23 million.

We paid just slightly over 7x. You can see from anticipated EBITDA margin, they're a little higher than what we normally see in personal care..

Right. And Whit, I'll just add to that briefly in talking about margin profile. I mean, this is a division of a parent company, so it doesn't come with a lot of corporate overhead that would need to be synergized. But it'll fit in nicely into our profile in the state that won't require a lot of additional corporate adds on our end as well..

My next question, just back to the managed care mix, it was the highest we've seen, and then I think you've noted some higher bad debt.

Can you just flesh out what's happening there and whether or not this is just the receivables just aging out, which is requiring a higher reserve? Or is this something about -- is there any deterioration in kind of like the collectibility, whatever issue it is?.

Yes. It's really two issues there. So in transitioning to managed care specifically in Illinois, we stated previously that, that process has not gone exactly smoothly, moving over authorizations from the state agencies into the MCO plans. So we have to work upstream to get everything documented properly.

So in the meantime, some of those receivables are aging out, and so we're making sure to be conservative on our reserves related to those. And then we've had some prior acquisition AR that has aged out that we've had to take some additional reserves on kind of in the interim as well. And we've referenced that.

But nothing else from a collectability standpoint in the state. We actually made good progress in April with a couple of big MCO plans in Illinois, I got some decent-sized payments from them. So we bring some catch-up there. So we're hoping to see that continue.

Again, our teams are very focused on working with the state and the plans to make sure that, that transition is as smooth as possible. Again, just trying to make sure that, that happens quickly..

So it sounds like this is just more normal movement within the quarter. And maybe just the last one, Dirk, high level. How are you thinking about the potential for block grants in the context of an ACA repeal/replace and, just broadly, how you guys think about the implications on personal care services in general? I'll hop off..

Yes. Thank you, Whit. It's awfully hard to know how to react at this point to the potential changes, if any, in Medicaid. I do know this, that our team is very convinced and worked hard to be a low-cost provider. If you look at home personal care itself, we are the lowest cost service in the home.

And so we don't know exactly how we would play if Medicaid states had block grants, but what we do know is at that point in time, they're going to be looking for ways to service their residents in the state within the guidelines of those block grants. And we believe we can be a player in that market. We are a low-cost provider.

We help keep these Medicaid residents in their home, right now, on average of around 26 months and keeps them out of the higher-cost setting, whether that be an emergency room or a Medicaid paid nursing home.

So while we don't have an exact understanding of what the changes may be in the future, we believe we're well positioned to be a player when they occur..

[Operator Instructions] And our next question comes from Mitra Ramgopal from Sidoti..

Dirk, I just wanted to follow up on Illinois first in terms of, how far along are you on the transition? Or when do you think you might be able to complete that?.

The transition of the Medicare -- I mean, of the MCO states?.

Yes..

It varies in different states. Right now, and let's look at Illinois, I think Illinois wants to eventually get -- I think they said at one time, their goal was 50% of their Medicaid program in MCOs, and they've change that, I think, to a target of 80%. Today, we're around -- that's around 25%.

So we're still somewhat in the early third of a conversion in the state. I will tell you, Illinois is probably the most difficult state as far as transition probably somewhat due to their financial condition because it's tough when you -- to get everybody working when a lot of the folks aren't getting paid.

So we've spent a lot of time and effort on our side working with MCOs, working with the state to make sure that the authorizations and the transfer of patients from the state to the MCOs are documented and are done in a timely manner so that we don't have issues. So we think it will continue to get better as we go forward..

And Mitra, I'll just put some color to Dirk's comments as well. So in Illinois, we had a big shift in Q4, really slowed in Q1. I think we've talked about previously, there's been a lot of ebb and flow in the state. So we're still around -- over 25% of our revenues in the state come from MCOs.

So what you saw really in the first quarter is the tick-up over 30% or 32%. It was really just a mix in New York rather than a continued shift in Illinois..

And then I had just a couple of questions on the acquisition front. Obviously, Options looked like a nice addition here, but I think in the past, you have mentioned states like Florida, Texas, Arizona that you would be looking at. I was just wondering, in terms of other states now that might be on your radar in terms of as you look at opportunities..

Well, we still believe that those states represent a good opportunity for growth in the future. There are additional states. What we look at is a state that, one, has a population -- a growing population of the elderly. The states are well run financially, which we've learned can be a big issue in states we operate in.

And then another issue relates to the minimum wage pressure that various states face. And so for us, as we look at those markets where we want to grow, we need to check those boxes as well as being in states preferably where we are today and can grow our strength in that state.

Now we would enter into a new state to check all those boxes if we could do so in a way that we knew there was future growth. So those states still stay on the list, but we continue to look at others that may also meet the criteria for growth..

And now that you have exited the ADC business, is the focus going forward pretty much going to be just on the personal care market? Or are you exploring ancillary areas?.

What we have done, as you saw with our change in our mission statement, is we revolve around the home. And so while personal care certainly is a very important aspect in that home and will be our prime area of growth for the future, we also would be looking at other avenues of home growth, such as hospice and others, that we have experience with.

And so we would do that strategically in conjunction with us being strong in a market with personal care. So we will look at other areas but as a strategic aspect of our personal care business..

[Operator Instructions] And our next question comes from Dana Hambly from Stephens..

Dirk, you mentioned in your prepared comments a new COO and more focus on operational improvements versus overhead. I was just wondering if you could elaborate on the distinction between the two..

Yes. When I think of overhead, what we've really been focused on there is cost controls from a corporate aspect, whether it be mileage that we can control from here, renegotiating telephone expenses, changing policy as it relates to cellphone, things like that.

When I talk about operational improvements, I'm talking about the way we actually do business in the market.

How do we staff our sites? Is there a consistent staffing model based on the size of the sites? How do we move our employees from turning in time with paper into turning in time electronically, which would then give us management information much more quickly while, at the same time, lessening our costs as it relates to issues related to payroll? So operational improvements is more along those lines, Dana..

And then I'd just add, as you -- external growth looks to become a bigger part of the overall growth profile, just thinking about the types of assets you're looking for. Appreciate the detail on Options. It sounds high quality.

But I'm wondering, some of the other stuff as we think about layering this in and what the margin profile would look like, should we expect all the deals to be accretive immediately? Or are you willing to take on some fixer-uppers? Just what are you seeing in the pipeline?.

Well, honestly, we're not looking to take on fixer uppers. I'm not saying that there might not be a strategic one that comes up and would make sense, but that's not our focus. Our focus are to find relatively well-run personal care hospice, others that we can bring on board and would be accretive.

Now as you know, Dana, anytime you bring on a deal, the first 2 or 3 months, there's going to be costs related to bringing that on that are going to add to -- through the P&L. But if you look at it without those costs, we anticipate doing accretive deals going forward..

And at this time, I'm showing no further questions. I'd like to turn the call back to Mr. Dirk Allison for any closing remarks..

Thank you, operator. I want to thank everyone for their participation on our earnings call today. You have a good week..

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. You may now disconnect. Everyone, have a great day..