Chemed Corporation — Q2 2011 Form 10-Q
Business context and period. Unaudited results for the quarter and six months ended June 30, 2011, compared with the same periods in 2010. Chemed operates VITAS Healthcare, a hospice-care provider, and Roto-Rooter, a plumbing and drain-cleaning business. Dollar amounts below are in millions unless otherwise noted.
Financial results
| Metric | Q2 2011 | Q2 2010 | Six months 2011 | Six months 2010 |
|---|---|---|---|---|
| Revenue | $333.4 | $315.0 | $664.3 | $623.8 |
| Operating income | $35.8 | $33.9 | $66.4 | $68.3 |
| Net income | $20.3 | $18.9 | $38.4 | $38.2 |
| Diluted EPS | $0.94 | $0.82 | $1.78 | $1.66 |
| Adjusted EBITDA | $46.7 | $44.9 | $92.3 | $88.0 |
| Adjusted EBITDA margin | 14.0% | 14.2% | 13.9% | 14.1% |
Q2 revenue increased 5.8%; net income rose 7.6% and diluted EPS rose 14.6%, aided by fewer average shares outstanding. For the first half, revenue grew 6.5%, while net income was nearly flat and diluted EPS increased 7.2%, also reflecting the lower share count. Adjusted EBITDA and margin are non-GAAP measures.
- Segments: Q2 VITAS revenue increased 7.3% to $243.1 million; Roto-Rooter increased 2.2% to $90.3 million. First-half revenue rose 6.5% at each segment, to $478.8 million at VITAS and $185.5 million at Roto-Rooter.
- Margins: Consolidated gross margin was 28.1% in Q2 versus 29.0% a year earlier, and 28.2% for the first half versus 29.0%. VITAS margin pressure reflected Medicare-cap effects, higher admissions and compliance labor costs, and start-up costs at new inpatient units. Roto-Rooter’s first-half margin also declined, partly due to excavation mix and an unfavorable casualty-insurance adjustment.
- Cash flow: Operating cash flow was $51.1 million for the first half, up from $20.3 million. The improvement was primarily related to the accounts-receivable movement, partly offset by accounts payable and other current liabilities. Investing outflows were $19.5 million, including $15.0 million of capital expenditures and $3.7 million for an acquisition. Financing outflows were $30.6 million, including $25.5 million of treasury-stock purchases and $6.0 million of dividends. Cash increased $1.0 million to $50.9 million.
- Liquidity and debt: Current assets were $203.6 million and current liabilities $135.3 million at June 30. Long-term debt carrying value was $162.9 million, representing $187.0 million principal of 1.875% convertible notes less unamortized discount. The notes’ fair value was $195.6 million. Chemed replaced its credit agreement in March with a five-year $350 million revolver priced at LIBOR plus 175 basis points; $29.5 million of letters of credit reduced availability, leaving about $320.5 million available, excluding a $150 million expansion feature. The company reported no variable-rate debt outstanding and compliance with all debt covenants.
- Other financial items: First-half other income included $2.8 million of market-value gains on deferred-compensation trust assets. The quarterly dividend was $0.14 per share, versus $0.12 a year earlier. The company repurchased 341,513 shares in the first half at a weighted-average $63.79 per share and authorized a new $100 million repurchase program; $97.4 million remained under that program at quarter-end.
Outlook, commentary, and risks
- Management forecast 2011 VITAS revenue growth, before Medicare cap effects, of 7.5%–8.5%, admissions growth of approximately 6.5%–7.0%, and adjusted EBITDA margin before Medicare cap of 15.3%–15.8%.
- Roto-Rooter forecast 2011 revenue growth of 6.5%–8.5%, with job-count growth of 0%–2.0%, and adjusted EBITDA margin of 17.0%–18.0%. Management expected operating income and cash flows to meet business needs and commitments for the foreseeable future.
- VITAS’s results remain exposed to Medicare and Medicaid reimbursement, compliance reviews, and Medicare’s annual per-beneficiary cap. The filing reports more than 90% of VITAS service revenue came from Medicare and Medicaid. A $0.7 million Medicare-cap liability remained at June 30.
- Regulatory risk includes ongoing government investigations into VITAS hospice billing and three qui tam complaints; the government had not decided whether to intervene, and Chemed could not predict outcomes or estimate potential liability. The company stated it believes it complies with applicable Medicare and Medicaid rules.
- Employment litigation includes a Roto-Rooter technician class action certified on certain claims in 14 states and a VITAS California case in which an appeals court affirmed denial of some class claims but reversed denial on other claims. The company contests the allegations and could not estimate potential liability.
- Chemed acquired the operating assets of Family Comfort Hospice in Alabama for $3.7 million on April 29, adding three locations serving ten counties. Management also noted higher VITAS labor and new-unit start-up costs. Forward-looking estimates are subject to risks and uncertainties.
Key facts for investors to verify
- Whether VITAS admissions and census growth persist and whether Medicare-cap accruals or reversals materially affect reported revenue and margins.
- Progress and potential exposure from the VITAS government investigations and qui tam complaints, and the two employment class actions; liabilities were not estimable in the filing.
- Whether segment growth and forecast margins are achieved, especially given lower reported gross margins and Roto-Rooter’s Q2 unit-for-unit job-count decline of 1.6% excluding changes in company-owned branches.
- Cash conversion and working-capital trends: first-half operating cash flow improved substantially, with management attributing much of the change to receivables timing.
- Debt and capital-allocation developments, including convertible-note dilution terms, use of the revolver, and future share repurchases under the remaining authorization.