Chemed Corporation — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016. Chemed operates VITAS hospice care and Roto-Rooter plumbing, drain-cleaning, and water-restoration services. Financial amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2016 | Q3 2015 | 9M 2016 | 9M 2015 |
|---|---|---|---|---|
| Revenue | $392.6 | $386.2 | $1,173.4 | $1,144.8 |
| Operating income | $42.9 | $50.1 | $125.6 | $135.3 |
| Net income | $26.8 | $28.8 | $76.6 | $80.3 |
| Diluted EPS | $1.62 | $1.65 | $4.54 | $4.61 |
| Adjusted net income (non-GAAP) | $28.6 | $30.9 | $86.6 | $87.5 |
| Adjusted diluted EPS (non-GAAP) | $1.73 | $1.78 | $5.14 | $5.02 |
| Adjusted EBITDA (non-GAAP) | $57.4 | $59.4 | $170.4 | $169.9 |
- Revenue grew 1.7% in Q3 and 2.5% in the first nine months. Roto-Rooter revenue increased 8.4% and 6.6%, respectively; VITAS revenue decreased 0.8% in Q3 and increased 1.0% year to date.
- Consolidated gross margin was 28.3% in Q3 versus 29.6%; year-to-date it was 28.7% versus 29.1%. VITAS gross margin fell to 20.7% in Q3 and 21.1% year to date, while Roto-Rooter improved to 47.8% and 48.0%, respectively.
- Operating income declined 14.5% in Q3 and 7.2% year to date; net income declined 7.0% and 4.7%. Management attributed VITAS pressure mainly to lower high-acuity service-line revenue and related margin effects. Year-to-date net income also included VITAS CEO early-retirement costs.
- Adjusted EBITDA margin was 14.6% in Q3 versus 15.4%, and 14.5% year to date versus 14.8%. Adjusted measures are non-GAAP; the filing provides reconciliations.
- Operating cash flow was $128.4 million for the first nine months, up from $113.1 million, mainly reflecting the timing-related decrease in receivables. Investing used $29.8 million, including $29.7 million of capital expenditures; financing used $92.0 million.
Financial position and capital
- At September 30, cash was $21.3 million, total debt was $110.6 million ($25.0 million revolver and $85.6 million term loan), and total stockholders’ equity was $487.2 million. Debt was $91.3 million at December 31, 2015.
- Approximately $287.6 million of revolving credit capacity remained available after $37.4 million of standby letters of credit. Chemed reported compliance with its debt covenants.
- Chemed repurchased 780,134 shares for $102.3 million during the first nine months; no repurchases occurred in Q3. Approximately $50.2 million remained authorized. Dividends paid were $12.2 million for the nine months; declared cash dividends were $0.26 per share in Q3.
- Debt bears floating interest tied to LIBOR. The filing states that each 100-basis-point rate change affects annual interest expense by $100,000 per $10 million borrowed.
Changes, outlook, and risks
- Roto-Rooter growth was broad-based, led by water restoration: revenue in that line rose 46.3% in Q3 and 31.6% year to date. VITAS total days of care increased 3.0% in Q3 and 4.7% year to date, but its high-acuity days and related revenue mix weakened.
- CMS’s 2016 hospice reimbursement rebasing reduced VITAS revenue by an estimated 2.0% versus the prior methodology for the three- and nine-month periods, despite $1.3 million and $3.3 million of Service Intensity Add-on payments, respectively. VITAS reported a 25/75 routine-homecare days-of-care ratio.
- Management’s 2016 outlook: VITAS revenue growth of 1.0%–2.0% before Medicare cap, average daily census growth of approximately 4.5%–5.0%, and adjusted EBITDA margin of 14.0%–14.5% before cap; the guidance includes $1.25 million for Medicare cap billing limitations. Roto-Rooter revenue growth was expected at 5.0%–5.5% and adjusted EBITDA margin at 21.0%–21.3%. Management expected operating income and cash flows to meet foreseeable operating and commitment needs.
- VITAS is appealing CMS’s “as if” sequestration methodology for Medicare cap calculations. The company said $2.1 million was identified as owed for three programs across the 2013–2015 measurement periods; $1.9 million of potential exposure was not reserved at quarter-end. A $228,000 liability was recorded for one program’s projected 2015 measurement-period exposure.
- A government False Claims Act case alleges improper hospice billing and seeks treble damages and penalties. The company said it cannot reasonably estimate the probability or range of loss and intends to defend the matter. Related regulatory and investigation costs were $4.1 million for the first nine months of 2016. A shareholder derivative matter remained pending on a motion to substitute a plaintiff and amend the complaint; the company said it could not estimate outcomes or potential losses.
- Other notable item: VITAS recorded $4.5 million pretax ($2.8 million after tax) in early-retirement and accelerated stock-compensation costs related to its former CEO. The company reported no material change in previously disclosed risk factors.
Key facts for investors to verify
- Whether VITAS can improve high-acuity service mix and margins while sustaining census growth under the revised Medicare payment methodology.
- Progress and potential financial exposure from the Medicare cap methodology appeal, including the unreserved $1.9 million potential amount.
- Developments, potential costs, and possible business effects of the False Claims Act and shareholder derivative proceedings.
- Execution against segment guidance, especially Roto-Rooter water-restoration growth and VITAS’s revenue and adjusted-margin targets.
- Use of cash for repurchases, dividends, capital spending, and debt reduction, alongside floating-rate debt exposure.