CHEMED CORP quarterly report, Q2 FY2017

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Chemed Corporation — Q2 2017 Form 10-Q

Reporting period: Three and six months ended June 30, 2017. Chemed operates VITAS, a hospice-care provider, and Roto-Rooter, a plumbing, drain-cleaning and water-restoration business. Dollar amounts below are in millions unless otherwise stated.

Financial performance

  • Revenue: Q2 revenue was $415.1, up 6.3% year over year; first-half revenue was $820.9, up 5.1%. Q2 VITAS revenue rose 2.1% to $284.7 and Roto-Rooter revenue rose 16.7% to $130.3. Roto-Rooter water restoration was a major growth driver.
  • Profit and EPS: Q2 GAAP net loss was $21.7, or $1.35 per diluted share, versus net income of $24.9, or $1.48 diluted EPS, a year earlier. First-half net income was $8.2, or $0.49 diluted EPS, versus $49.7, or $2.93. Results include the litigation accrual described below. Management’s non-GAAP adjusted net income was $35.9 in Q2 and $66.4 for the first half; adjusted diluted EPS was $2.15 and $3.96, respectively.
  • Margins and adjusted EBITDA: Consolidated gross margin increased to 31.1% in Q2 from 29.2%, and to 30.4% for the first half from 29.0%. Adjusted EBITDA was $68.5 in Q2 versus $58.5, and $128.3 for the first half versus $113.0; adjusted EBITDA margin was 16.5% and 15.6%, respectively. These are non-GAAP measures.
  • Cash flow and investment: First-half operating cash flow was $100.3, up from $73.4. Investing cash use was $28.6, including $28.1 of capital expenditures. Financing cash use was $73.3, including $85.1 of treasury-stock purchases and $8.4 of dividends. Cash declined $1.6 to $13.8. The litigation accrual was noncash at quarter-end.
  • Debt and liquidity: Total debt was $125.0 at June 30, comprising $45.0 drawn on the revolver and an $80.0 term loan; debt was $108.8 at year-end 2016. The company reported $268.9 of available revolving credit after letters of credit and said it complied with debt covenants. Cash and cash equivalents were $13.8. Current liabilities were $268.6 versus current assets of $156.5, with the increase in accrued legal liabilities a key factor.
  • Other balance-sheet items: Accrued legal liabilities rose to $92.5 from $1.8 at year-end, principally reflecting the potential settlement accrual. Properties and equipment increased $18.9 to $140.2, mainly due to transportation equipment purchases.

Changes versus the prior comparable period

  • Growth was stronger at Roto-Rooter than VITAS. Q2 Roto-Rooter revenue increased 16.7%, led by water restoration; VITAS increased 2.1%, reflecting higher reimbursement rates and more days of care, partly offset by an unfavorable acuity mix.
  • VITAS gross margin improved to 22.8% in Q2 from 21.5%; Roto-Rooter gross margin improved to 49.3% from 48.5%. Management cited cost management at VITAS and revenue growth, especially water restoration, at Roto-Rooter.
  • Reported earnings deteriorated sharply because of the $90.0 pretax litigation charge. Excluding specified items, adjusted net income and adjusted EBITDA increased year over year.
  • VITAS after-tax results were a Q2 loss of $32.3 and a first-half loss of $11.7, compared with profits of $18.6 and $37.6 in the corresponding 2016 periods. Roto-Rooter after-tax income rose to $17.1 in Q2 and $31.7 for the first half.

Outlook, commentary and risks

  • 2017 guidance: VITAS expected revenue growth of 2.0%–3.0% before Medicare cap, admissions and average daily census growth of approximately 3.0%–5.0%, and adjusted EBITDA margin of 15.0%–15.5%; guidance included $2.5 million for Medicare cap billing limitations. Roto-Rooter expected revenue growth of 12.0%–13.0% and adjusted EBITDA margin of 22.0%–22.5%. Management expected operating income and cash flows to cover business needs and commitments. These are forward-looking estimates, not guarantees.
  • Federal litigation: In the False Claims Act case concerning alleged hospice billing practices, Chemed recorded a $90.0 pretax ($55.8 after-tax) charge for a potential settlement, including attorneys’ fees. The company said settlement was probable following mediation, but definitive terms remained unresolved and no final settlement was assured. The allegations are not a finding of liability.
  • Other legal and regulatory matters: Shareholder derivative litigation and two California employee class-action cases remained ongoing; the company could not reasonably estimate their probability or range of loss. VITAS also recorded Medicare cap liabilities of $0.5. The company disputed CMS’s “as if” sequestration calculation and had not reserved $1.9 of potential exposure; it was pursuing an appeal.
  • Other risks and items: More than 90% of VITAS service revenue came from Medicare and Medicaid. One pharmacy-services provider represented approximately 90% of VITAS pharmacy services. The company had $125.0 of variable-rate debt; a 100-basis-point rate change would alter annual interest expense by $1.25 at that debt level. Risk factors were reported as unchanged from the latest Form 10-K.
  • Accounting and capital allocation: Adoption of stock-compensation accounting guidance reduced income tax expense by $2.6 in Q2 and $6.3 for the first half. Chemed repurchased 450,000 shares for $85.1 in the first half and reported $65.1 remaining under its repurchase authorization.

Important facts for investors to verify

  • Whether the DOJ False Claims Act matter reached a definitive settlement, and whether its final amount or terms differed from the $90.0 accrual.
  • The status and financial exposure of the Medicare cap dispute, including the unreserved $1.9 potential exposure.
  • Whether VITAS and Roto-Rooter achieved the stated 2017 growth and adjusted EBITDA margin guidance.
  • Whether Roto-Rooter’s water-restoration growth continued and whether VITAS census, acuity mix and service-line margins developed as expected.
  • How cash generation, capital spending, share repurchases and debt changed after the reporting date, including the impact of variable interest rates.