Chemed Corporation — Q2 2014 Form 10-Q
Business context and reporting period
For the quarter and six months ended June 30, 2014. Chemed operates VITAS, a hospice provider, and Roto-Rooter, a plumbing and drain-cleaning business. Figures below are in millions of dollars unless stated otherwise; comparative periods are 2013.
Financial performance and position
| Metric | Q2 2014 | Q2 2013 | First half 2014 | First half 2013 |
|---|---|---|---|---|
| Revenue | $360.2 | $357.2 | $718.5 | $723.8 |
| Operating income | $41.5 | $25.9 | $78.2 | $64.7 |
| Net income | $24.4 | $14.6 | $44.9 | $36.9 |
| Diluted EPS | $1.36 | $0.77 | $2.48 | $1.94 |
| Adjusted EBITDA (non-GAAP) | $52.2 | $52.9 | $99.9 | $104.2 |
| Adjusted EBITDA margin (non-GAAP) | 14.5% | 14.8% | 13.9% | 14.4% |
Consolidated gross margin was 28.6% in Q2 versus 28.5%; first-half gross margin was 28.3% versus 28.2%. Adjusted net income was $26.6 million and adjusted diluted EPS $1.50 in Q2, compared with $27.2 million and $1.44. For the first half, adjusted net income was $50.3 million versus $53.4 million and adjusted diluted EPS was $2.81 in both periods. Adjusted figures are non-GAAP measures.
First-half operating cash flow was $45.1 million versus $84.7 million, primarily reflecting a $33.6 million use from accounts payable and other current liabilities, compared with a source in 2013. Capital expenditures were $19.5 million versus $12.2 million. Cash was $27.9 million at June 30, down from $84.4 million at year-end.
At June 30, total debt was $160.0 million: $60.0 million drawn on the revolver and $100.0 million term loan. The company had approximately $253.1 million of available credit after letters of credit. The new five-year facility includes a $350 million revolver and $100 million term loan, with a floating rate then at LIBOR plus 125 basis points. Chemed reported compliance with its debt covenants. Current assets were $165.5 million and current liabilities $156.7 million.
Material changes versus the prior period
- Q2 revenue increased 0.8%; first-half revenue declined 0.7%. Roto-Rooter grew 2.7% in both periods, while VITAS grew 0.2% in Q2 but fell 2.0% in the first half.
- Reported earnings improved substantially against Q2 and first-half 2013, when Roto-Rooter recorded a $14.8 million pretax litigation settlement expense ($9.0 million after tax). Accordingly, reported growth does not reflect comparable underlying performance: adjusted EBITDA declined in both periods, and first-half adjusted net income fell.
- VITAS’ first-half revenue was pressured by Medicare sequestration, lower average daily census and care/geographic mix. Medicare and Medicaid accounted for over 90% of VITAS revenue. Roto-Rooter’s revenue gains included price and mix, contractor operations and other services, while drain-cleaning job volumes declined.
- On May 15, Chemed retired $187.0 million of convertible notes using cash and revolving-credit borrowings. It issued 249,000 shares on conversion and received 266,000 shares through the related purchased-call transaction. The June 30 balance sheet reflects the replacement credit facility and $160.0 million of debt.
- Chemed repurchased 682,934 shares in the first half for $58.5 million. The board authorized an additional $100 million for repurchases; $63.3 million remained authorized at June 30.
Outlook, risks and unusual items
- Management’s 2014 outlook: VITAS revenue growth of 1%–2% before Medicare cap, admissions growth estimated at 2%, adjusted EBITDA margin of 14.5%–15.0% before cap, and Medicare cap estimated at $3.7 million. Roto-Rooter revenue growth was expected at 3%–4% and adjusted EBITDA margin at 19.5%–20.0%.
- VITAS recorded a $704,000 net positive Medicare-cap adjustment in the first half, but reported a $4.1 million Medicare-cap liability at June 30 and repaid $3.4 million related to the 2013 measurement period in Q2.
- Significant ongoing VITAS-related False Claims Act and regulatory matters concern alleged hospice eligibility and billing practices. Chemed stated that outcomes, timing and potential losses could not be estimated; it warned of possible payments, defense costs, management distraction and reputational effects. A securities class action was approved for settlement after quarter-end, July 15, 2014, with the insurer funding $6.0 million. Derivative actions also remained pending.
- Debt is variable-rate: $160 million was outstanding, and a 100-basis-point change changes annual interest expense by $100,000 per $10 million borrowed. Chemed cited this as its primary market risk.
- Management said operating income and cash flows should support operations and foreseeable commitments. No material risk-factor changes were reported. The filing provides no company-wide full-year earnings or cash-flow guidance.
Important facts for investors to verify
- Track VITAS census, admissions, care mix and Medicare-cap estimates, along with developments in the federal and state investigations and litigation.
- Assess Roto-Rooter job volumes and whether its revenue growth and margins persist beyond price, mix and non-core service contributions.
- Reconcile reported results with the prior-year settlement charge and Chemed’s non-GAAP adjustments; evaluate the decline in adjusted EBITDA and first-half operating cash flow.
- Review debt repayment schedules, variable-rate exposure, covenant headroom, available revolver capacity and planned capital allocation, including share repurchases.
- Confirm remaining warrant dilution exposure: half of the warrants remained outstanding and could dilute shares if the average stock price exceeded $102.20.