Chemed Corp. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; unaudited consolidated results. Chemed operates VITAS, a hospice-care provider, and Roto-Rooter, a plumbing, drain-cleaning and water-restoration business. Amounts below are in millions unless otherwise noted.
Financial results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $390.4 | $376.7 | +3.6% |
| Operating income | $44.4 | $40.6 | +9.4% |
| Net income | $24.8 | $24.5 | +1.2% |
| Diluted EPS | $1.45 | $1.40 | +3.6% |
| Adjusted net income (non-GAAP) | $27.8 | $26.8 | +3.4% |
| Adjusted diluted EPS (non-GAAP) | $1.62 | $1.54 | +5.2% |
| Adjusted EBITDA (non-GAAP) | $54.5 | $52.8 | +3.1% |
| Adjusted EBITDA margin | 14.0% | 14.0% | Flat |
Consolidated gross margin was 28.7%, versus 28.6%. Operating margin was approximately 11.4%, versus 10.8%; net margin was approximately 6.4%, versus 6.5%. The effective tax rate was 38.9%, essentially unchanged.
Revenue was $277.5 million at VITAS (+2.9%) and $112.9 million at Roto-Rooter (+5.4%). Segment after-tax earnings were $19.1 million at VITAS (down 1.2%) and $13.0 million at Roto-Rooter (up 8.4%). VITAS’ gross margin declined to 21.0% from 21.2%; Roto-Rooter’s increased to 47.6% from 47.3%.
Cash, liquidity and debt
- Operating cash flow was $7.2 million, down from $12.4 million. The increase in accounts receivable was a major use of cash; management attributed the $36.8 million balance-sheet increase in receivables primarily to payment timing for Medicare and Medicaid.
- Capital expenditures were $11.5 million, versus $8.6 million. Operating cash flow less capital expenditures was negative $4.3 million.
- Cash and cash equivalents were $15.2 million at March 31, 2016. Current assets were $179.9 million and current liabilities were $191.6 million.
- Total debt was $144.9 million, compared with $91.3 million at December 31, 2015. The increase primarily reflected revolving-credit borrowings, largely used to repurchase shares. Debt carries a floating rate tied to LIBOR.
- Approximately $256.7 million remained available under the revolving facility after $37.8 million in standby letters of credit. The company reported compliance with its debt covenants.
- Chemed repurchased 400,000 shares for $52.5 million at a weighted-average $131.15 per share and authorized an additional $100 million for repurchases. The quarterly dividend was $0.24 per share, versus $0.22.
Changes, outlook and notable items
- Revenue growth reflected higher activity in both businesses. VITAS days of care rose 6.8%, led by a 7.5% increase in routine homecare days. Roto-Rooter growth included a 19.2% increase in water-restoration revenue.
- VITAS’ first-quarter revenue was 2.1% lower than it estimates it would have been under the prior Medicare hospice reimbursement methodology. New reimbursement rules introduced a two-tier routine-homecare rate and a service-intensity add-on; VITAS received about $1.0 million in add-on payments and reported a 25/75 ratio of routine-homecare days in the first 60 days of care versus later days.
- Management’s 2016 outlook: VITAS revenue growth of 2.5%–3.5% before Medicare cap, admissions growth of 3.0%, and adjusted EBITDA margin of 14.0%–15.0% before cap; Roto-Rooter revenue growth of 3.5%–4.5% and adjusted EBITDA margin of 20.0%–21.0%. VITAS estimated 2016 Medicare cap billing limitations of $3.8 million. Management said operating income and cash flows should be sufficient for foreseeable needs.
- Other expense included a $3.0 million unfavorable market-value adjustment on deferred-compensation trust assets, versus $1.0 million of favorable adjustment a year earlier. This contributed to the gap between modest reported net-income growth and adjusted results. OIG investigation-related costs were $2.3 million, versus $1.3 million.
- VITAS is highly dependent on government reimbursement: more than 90% of its service revenue came from Medicare and Medicaid. The company disputed a further $1.9 million Medicare-cap amount assessed under CMS’s “as if” sequestration methodology, had appealed it, and had not reserved for it. No Medicare-cap amount was recorded in Q1 2016; the recorded cap liability was $0.5 million at quarter-end.
- A federal False Claims Act case alleges improper hospice billing and seeks treble damages and penalties. Chemed said it could not estimate the probability or range of loss and intends to defend the matter. Related regulatory proceedings and shareholder derivative litigation also remain; the company cautioned they could entail costs, management distraction and adverse effects.
- Chemed identified variable-rate debt as its primary market-risk exposure. It estimated that a 100-basis-point rate change affects annual interest expense by $100,000 for each $10 million borrowed. Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether receivable collections and operating cash flow normalize after the quarter-end payment-timing effects, particularly given negative operating cash flow after capital expenditures.
- VITAS’ performance under the revised Medicare reimbursement structure, including days-of-care mix, service-intensity payments, revenue growth and the estimated Medicare cap limitation.
- Developments and potential financial exposure from the False Claims Act action, related investigations, derivative suits and the disputed $1.9 million Medicare-cap assessment.
- How continued share repurchases, debt levels and floating interest rates affect liquidity, earnings and covenant headroom.
- Non-GAAP adjustments and the effect of deferred-compensation market-value changes and investigation costs on comparisons with reported results.