Chemed Corporation — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. Chemed operates VITAS, a hospice-care provider, and Roto-Rooter, a plumbing, drain-cleaning and water-restoration business. Financial amounts below are in millions, except per-share data.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $417.4 | $392.6 | $1,238.4 | $1,173.4 |
| Operating income | $54.0 | $42.9 | $56.5 | $125.6 |
| Net income | $35.4 | $26.8 | $43.6 | $76.6 |
| Diluted EPS | $2.13 | $1.62 | $2.60 | $4.54 |
| Adjusted net income (non-GAAP) | $35.8 | $28.6 | $102.2 | $86.6 |
| Adjusted diluted EPS (non-GAAP) | $2.15 | $1.73 | $6.10 | $5.14 |
| Adjusted EBITDA (non-GAAP) | $67.6 | $57.4 | $195.9 | $170.4 |
| Adjusted EBITDA margin (non-GAAP) | 16.2% | 14.6% | 15.8% | 14.5% |
Q3 revenue grew 6.3%; adjusted EBITDA margin increased 160 basis points. Nine-month revenue grew 5.5% and adjusted EBITDA margin rose 130 basis points. Reported nine-month net income includes a $90.0 million pretax ($55.8 million after-tax) accrual for a potential VITAS litigation settlement; excluding specified items, adjusted earnings increased year over year. Adjusted measures are non-GAAP and should be considered alongside GAAP results.
Consolidated gross margin was 31.0% in Q3 versus 28.3%, and 30.6% for the first nine months versus 28.7%. Q3 income taxes were $18.8 million and the effective tax rate was 34.7%; the nine-month rate was 25.8%. Adoption of stock-compensation accounting guidance reduced tax expense by $1.8 million in Q3 and $8.1 million year to date, increasing diluted EPS by $0.09 and $0.46, respectively.
Segment results and drivers
- VITAS: Revenue was $289.0 million in Q3 (+2.2%) and $856.0 million year to date (+2.0%). Management cited higher Medicare reimbursement rates and increased days of care, partly offset by acuity mix. Q3 after-tax earnings were $26.5 million versus $20.9 million; nine-month after-tax earnings were $14.8 million versus $58.5 million, primarily reflecting the settlement accrual. More than 90% of VITAS revenue came from Medicare and Medicaid.
- Roto-Rooter: Revenue was $128.5 million in Q3 (+17.1%) and $382.4 million year to date (+14.4%). Water restoration was a major growth driver, rising 77.2% in Q3 and 64.6% year to date. Q3 after-tax earnings were $16.0 million versus $12.9 million; nine-month earnings were $47.7 million versus $39.2 million.
Cash flow, balance sheet and liquidity
- Operating cash flow for the first nine months was $191.0 million versus $128.4 million; capital expenditures were $50.2 million versus $29.7 million. The filing notes the settlement accrual was noncash at period-end.
- Cash was $18.9 million at September 30, 2017. Total debt was $82.5 million ($10.0 million current), down from $108.8 million at year-end 2016. The credit facility is floating-rate, at LIBOR plus 113 basis points; the company reported covenant compliance.
- Approximately $309.4 million of revolving credit was available after $35.6 million of standby letters of credit. Management said liquidity and capital resources were sufficient for foreseeable needs.
- Accrued legal liabilities rose to $91.5 million from $1.8 million, principally due to the potential settlement accrual. Current liabilities increased to $269.4 million from $171.8 million; this materially affects the reported current-liquidity position.
- Chemed repurchased 500,000 shares for $94.6 million during the first nine months and paid $12.9 million in dividends. The filing reported $55.5 million remaining under the repurchase authorization.
Outlook, risks and unusual items
- 2017 guidance: VITAS expected revenue growth before Medicare cap of 2%–3%, admissions and average daily census growth of approximately 2%–3%, and adjusted EBITDA margin of 15.0%; guidance included $1.5 million for Medicare cap billing limitations. Roto-Rooter expected revenue growth of 13%–14% and adjusted EBITDA margin of approximately 22.5%.
- Federal litigation: The company considered settlement of the False Claims Act case probable and accrued $90.0 million pretax, including attorney fees. A definitive settlement remained subject to resolving issues and negotiating documentation; there was no assurance it would be reached on those terms.
- Other legal matters: Shareholder derivative litigation and multiple California wage-and-hour class-action lawsuits remained pending. The company could not reasonably estimate loss probability or range for the employment cases and said legal matters could involve costs, payments, management distraction and adverse publicity.
- Medicare cap: VITAS disputed CMS’s “as if” sequestration methodology related to a stated $2.3 million of additional cap liability. The company had not reserved $480,000 of potential exposure and had appealed the methodology. No Medicare cap was recorded for Q3 2017.
- Other items and exposures: VITAS recorded $1.1 million of net expenses related to closing three Alabama programs during the first nine months. Variable-rate debt creates interest-rate exposure. VITAS relied on one provider for more than 90% of pharmacy services used in the periods presented. The company reported no material hurricane-related business interruption or asset loss in Houston or Florida during the period.
- The company anticipated a material increase in assets and liabilities when operating leases are recognized under the forthcoming lease standard; it had no specific estimate. It expected no material effect from the cited cash-flow standard and no effect from the cited goodwill standard.
Most important facts to verify
- Progress and final terms of the DOJ/VITAS settlement, including whether the $90.0 million accrual is adequate and when cash payment may occur.
- Underlying earnings trends: compare GAAP results with management’s non-GAAP adjustments, especially the settlement charge and stock-compensation tax benefits.
- VITAS operating trends, including patient mix, days of care, Medicare reimbursement and cap exposure; confirm the status of the CMS appeal.
- Roto-Rooter’s water-restoration growth and whether segment guidance and margins are sustained.
- Cash conversion, capital spending, share repurchases, debt reduction and liquidity after settlement payments or other legal outcomes.
- Developments in the California employment cases and derivative litigation, for which the filing provides no clear loss estimate.