Chemed Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Chemed operates VITAS, a hospice-care business, and Roto-Rooter, a plumbing, drain-cleaning and water-restoration business. Amounts below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q1 2015 | Q1 2014 | Change |
|---|---|---|---|
| Revenue | $376.7 | $358.3 | +5.1% |
| Income from operations | $40.6 | $36.7 | +10.7% |
| Net income | $24.5 | $20.6 | +19.3% |
| Diluted EPS | $1.40 | $1.12 | +25.0% |
| Adjusted net income (non-GAAP) | $26.8 | $23.7 | +13.2% |
| Adjusted diluted EPS (non-GAAP) | $1.54 | $1.32 | +16.7% |
| Adjusted EBITDA (non-GAAP) | $52.8 | $47.7 | +10.9% |
| Adjusted EBITDA margin | 14.0% | 13.3% | +0.7 percentage points |
| Operating cash flow | $12.4 | $(11.8) | Improved $24.2 |
| Capital expenditures | $8.6 | $8.1 | |
| Cash dividends per share | $0.22 | $0.20 |
Revenue growth and lower relative operating-cost growth lifted operating income. The filing reports consolidated gross margin of 28.6%, versus 28.0% a year earlier. The effective tax rate was 38.9%, essentially unchanged. Adjusted measures are non-GAAP and should not be treated as substitutes for GAAP results.
At March 31, cash and cash equivalents were $28.3 million, current assets $208.5 million and current liabilities $171.6 million. Accounts receivable was $145.8 million, up $21.2 million from year-end, primarily attributed to payment timing. Management says VITAS federal payments—typically more than $35 million every other Friday—can cause period-end receivables to fluctuate.
Total debt was $161.3 million ($6.9 million current and $154.4 million long-term), up from $147.5 million at December 31, 2014. Debt comprises a $65.0 million revolver and $96.25 million term loan under a five-year credit agreement; the current rate was LIBOR plus 113 basis points. The company reported $248.4 million of available revolving capacity after $36.6 million of standby letters of credit. It was in compliance with all debt covenants. All outstanding debt is variable-rate.
Segments and material changes
- VITAS: Revenue was $269.6 million, up 3.5%; after-tax earnings were $19.3 million, up 6.4%. Management attributed revenue growth to a 1.4% increase in Medicare reimbursement rates, 3.5% more days of care and mix. Total days of care rose 3.5%; admissions increased from 16,353 to 17,268. More than 90% of VITAS revenue came from Medicare and Medicaid.
- Roto-Rooter: Revenue was $107.0 million, up 9.3%; after-tax earnings were $12.0 million, up 19.7%. Water-restoration revenue rose $8.9 million (587.5%), largely from expansion to additional locations. Plumbing revenue increased 2.2% despite a 7.5% decline in jobs, supported by price and mix; drain-cleaning revenue fell 2.8% as job volume declined.
- VITAS and Roto-Rooter after-tax earnings increased by $1.2 million and $2.0 million, respectively. Corporate loss narrowed to $6.8 million from $7.6 million.
- Interest expense fell to $1.0 million from $3.8 million, primarily reflecting the prior-year convertible-note accounting and debt structure. Average diluted shares also declined, contributing to EPS growth; the convertible notes matured in May 2014.
Outlook, risks and unusual items
- 2015 outlook: VITAS expects revenue growth, before Medicare cap effects, of 3.0%–4.0%, admissions growth of 4.0%, and adjusted EBITDA margin before cap of 14.0%–15.0%. Management estimates Medicare cap billing limitations of $4.3 million for 2015.
- Roto-Rooter outlook: Revenue growth of 3.0%–4.0% and adjusted EBITDA margin of 19.0%–20.0%. The revenue outlook reflects continued water-restoration expansion and approximately 1.0% higher job pricing.
- Management expects operating income and cash flows to support operations and commitments for the foreseeable future and considers liquidity satisfactory. It continually evaluates capital uses, including repurchases, debt repayment, acquisitions and dividends. The board authorized an additional $100 million for repurchases in March; $111.8 million remained authorized at quarter-end. No shares were repurchased in Q1.
- Legal and regulatory exposure: VITAS faces government investigations and consolidated False Claims Act litigation alleging improper hospice eligibility and billing, among other claims. The company says it cannot estimate timing, outcome or any probable and estimable loss; it intends to defend the matters. Related investigation costs were $1.3 million in Q1 2015 versus $0.7 million in Q1 2014. Separate shareholder derivative actions were consolidated, and defendants renewed a motion to dismiss. The filing warns of potential defense costs, payments, management distraction and reputational effects.
- Medicare cap: VITAS recorded a $165,000 positive reversal of a prior-quarter estimate in Q1 2015, compared with a $847,000 positive adjustment in Q1 2014. The quarter-end cap liability was $1.4 million after $4.6 million of payments.
- Other notable items and risks: VITAS sourced approximately 90% of its pharmacy services from Omnicare. A 100-basis-point rate change changes annual interest expense by $100,000 for each $10 million borrowed. Management reported disclosure controls were effective and no material change in internal control; no material changes to previously disclosed risk factors were reported.
Key facts for investors to verify
- Whether VITAS can deliver its stated growth and margin outlook while controlling Medicare cap exposure and responding to ongoing federal and state scrutiny.
- Progress, potential financial impact and any developments in the consolidated False Claims Act matters and shareholder litigation; the filing provides no clear estimate of potential loss.
- Whether Roto-Rooter’s water-restoration growth is sustainable and how job volumes, pricing and favorable casualty-insurance experience affect segment margins.
- Accounts-receivable collection timing, operating cash conversion and the effect of working-capital movements on liquidity.
- Floating-rate debt exposure, covenant compliance and planned capital allocation, including the expanded share-repurchase authorization.
- Performance against the company’s non-GAAP adjusted earnings and EBITDA measures, including the adjustments used in those measures.