Chemed Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. Chemed operates VITAS, a hospice-care provider, and Roto-Rooter, a plumbing, drain-cleaning and water-restoration services business. Unless otherwise stated, financial amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2018 | Q2 2017 | First half 2018 | First half 2017 |
|---|---|---|---|---|
| Revenue | $441.8 | $415.1 | $881.0 | $820.9 |
| Operating income | $58.1 | $(38.9) | $114.5 | $2.5 |
| Net income (loss) | $55.0 | $(21.7) | $100.0 | $8.2 |
| Diluted EPS | $3.27 | $(1.35) | $5.93 | $0.49 |
| Adjusted EBITDA* | $73.7 | $68.5 | $146.4 | $128.3 |
| Adjusted EBITDA margin* | 16.7% | 16.5% | 16.6% | 15.6% |
Revenue grew 6.4% in Q2 and 7.3% in the first half. Q2 growth reflected increases at both VITAS (4.2%) and Roto-Rooter (11.3%); first-half growth was 3.8% and 15.1%, respectively. Consolidated gross margin was 30.8% in Q2 versus 31.1%, and 30.7% for the first half versus 30.4%.
For the six months, operating cash flow was $121.0 million, compared with $100.3 million a year earlier. Capital expenditures were $23.9 million; cash used in investing activities was $25.2 million and cash used in financing activities was $94.3 million. Cash increased $1.5 million to $12.7 million.
At June 30, 2018, total debt was $103.4 million, up from $101.2 million at year-end 2017. Current assets were $173.4 million and current liabilities $166.4 million. The company reported $310.2 million of available borrowing capacity under its revolving facility, after accounting for issued letters of credit. It was in compliance with debt covenants.
*Adjusted EBITDA and its margin are non-GAAP measures; the filing cautions they should not be viewed as substitutes for GAAP results.
Material changes and notable items
- GAAP earnings improved sharply versus 2017, principally because the prior-year period included a $90.0 million pretax VITAS litigation-settlement charge ($55.8 million after tax). The settlement was paid in 2017; $0.3 million remained accrued for legal and administrative fees at June 30, 2018.
- Q2 and first-half 2018 net income included excess tax benefits on stock compensation of $11.7 million and $15.5 million, respectively. The reported effective tax rates were 4.7% for Q2 and 12.2% for the first half. Comparisons with 2017 are affected by the settlement charge and differing tax effects.
- Chemed adopted ASC 606 on January 1, 2018 using the modified retrospective method. It reclassified certain VITAS and Roto-Rooter items from expenses to contra-revenue. Management reported no impact on net income, but 2017 was not restated; the change reduced reported 2018 revenue by $7.2 million in Q2 and $14.6 million in the first half versus prior classification.
- VITAS total days of care increased 7.6% in Q2 and 6.9% in the first half. Roto-Rooter growth included strong water-restoration revenue, up 18.5% in Q2 and 34% in the first half, as reported in the segment discussion.
- Operating cash flow rose year over year, partly reflecting the comparison with the prior-year settlement and related earnings effects. Management also cited timing of federal payments as a source of VITAS receivables and cash-flow variability.
Guidance, risks and contingencies
- 2018 outlook: VITAS forecast full-year revenue growth of 4.0%–5.0% before Medicare cap adjustments, admissions growth of approximately 4.5%–5.0%, average daily census growth of approximately 5.5%, and adjusted EBITDA margin of 15.9% before Medicare cap. Guidance included $2.5 million for Medicare cap billing limitations. Roto-Rooter forecast revenue growth of 12.0%–13.0% and adjusted EBITDA margin of approximately 24.0%. These are management estimates, not guarantees.
- VITAS operates in a heavily regulated, government-payor-dependent market: more than 90% of its service revenue came from Medicare and Medicaid. Medicare reimbursement limits, audits, cap calculations and regulatory interpretation may affect revenue. VITAS recorded a Q2 Medicare cap revenue reduction of $0.5 million and disclosed a dispute over $2.7 million in additional cap amounts being withheld under CMS’s “as if” sequestration methodology; the company appealed.
- VITAS is subject to a five-year Corporate Integrity Agreement requiring monitoring, reporting, training and independent reviews. Breach could result in stipulated penalties or exclusion from federal healthcare programs. The company also disclosed a shareholder derivative case and several California employment-related class-action matters; loss probability and range were not reasonably estimable. Management stated it intends to defend the claims.
- At June 30, 2018, variable-rate debt was $103.4 million. The filing estimates that a 100-basis-point rate change alters annual interest expense by $100,000 for each $10 million borrowed. VITAS also relied on one provider for more than 90% of its pharmacy services.
- The company anticipated a material increase in assets and liabilities when the new lease standard takes effect, but had no dollar estimate; it did not anticipate a material effect on net income or cash flow. Management said liquidity and capital resources were sufficient for foreseeable needs. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether operating growth and the guidance assumptions—especially VITAS census and Roto-Rooter water restoration—continued beyond the reported period.
- The effects of Medicare cap limits, the disputed $2.7 million withholding, and VITAS’s compliance obligations under the Corporate Integrity Agreement.
- How much reported earnings growth reflects recurring operations versus the 2017 settlement comparison, tax benefits from stock compensation, and other adjustments.
- How ASC 606 presentation changes affect comparisons of revenue and margins, given that prior-year figures were not recast.
- Debt levels, borrowing availability, variable-rate exposure, share repurchases and the eventual balance-sheet impact of lease-standard adoption.