Chemed Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Chemed operates VITAS hospice care and Roto-Rooter plumbing, drain-cleaning, and water-restoration services. Financial amounts below are in millions of dollars unless stated otherwise.
Financial performance and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $386.2 | $358.4 | $1,144.8 | $1,076.9 |
| Operating income | $50.1 | $40.2 | $135.3 | $118.4 |
| Net income | $28.8 | $24.6 | $80.3 | $69.5 |
| Diluted EPS | $1.65 | $1.39 | $4.61 | $3.87 |
| Adjusted EBITDA (non-GAAP) | $59.4 | $50.9 | $169.9 | $150.8 |
| Adjusted EBITDA margin (non-GAAP) | 15.4% | 14.2% | 14.8% | 14.0% |
- Revenue grew 7.8% in Q3 and 6.3% for the nine-month period. Net income increased 17.3% and 15.6%, respectively; diluted EPS increased 18.7% and 19.1%.
- Consolidated gross margin was 29.6% in Q3 versus 28.4%, and 29.1% for nine months versus 28.3%. Management attributed improvement principally to VITAS Medicare-cap comparisons and favorable health-insurance claims experience; Roto-Rooter also benefited from favorable health and casualty insurance experience year to date.
- Operating cash flow was $113.1 million for the first nine months, up from $51.0 million. Management cited higher net income, 2014 litigation-settlement payments that did not recur, and timing of other disbursements. Capital expenditures were $30.2 million; investing cash outflow was $36.4 million.
- Cash was $38.5 million at September 30, compared with $14.1 million at year-end 2014. Total debt was $138.1 million ($45.0 million revolver and $93.1 million term loan), down from $147.5 million at year-end. The company reported $268.4 million of available revolving credit after standby letters of credit and compliance with debt covenants.
- Debt is floating-rate, currently LIBOR plus 113 basis points. The filing estimates each 100-basis-point rate change affects annual interest expense by $100,000 per $10 million borrowed.
- Cash dividends were $0.24 per share in Q3 and $0.68 per share year to date. The company repurchased 385,765 shares for $48.0 million during the first nine months; $63.8 million of repurchase authorization remained.
Business trends and changes versus prior period
- VITAS: Q3 revenue rose 7.4% to $285.0 million; nine-month revenue rose 5.2% to $831.1 million. Days of care increased 7.4% in Q3 and 5.4% year to date. Growth reflected higher Medicare reimbursement rates and patient-care days, partly offset by geographic and level-of-care mix. More than 90% of VITAS service revenue came from Medicare and Medicaid.
- No Medicare cap was recorded in Q3 2015, compared with a $2.5 million charge in Q3 2014. For the first nine months, VITAS recorded a $165,000 reversal of a prior estimate, versus a $1.8 million cap charge in the comparable 2014 period. Management estimated 2015 Medicare cap billing limitations at $1.0 million.
- Roto-Rooter: Q3 revenue increased 8.8% to $101.2 million; nine-month revenue increased 9.3% to $313.7 million. Water-restoration revenue grew 53.5% in Q3 and 171.4% year to date as the service expanded to more locations. Plumbing also grew; nine-month drain-cleaning revenue was essentially flat.
- Two Roto-Rooter acquisitions were completed for $6.6 million in cash; their reported operating impact was not material. Goodwill increased $5.7 million from year-end, largely due to these acquisitions.
Outlook, commentary, and material risks
- Management forecast full-year 2015 VITAS revenue growth of 4.0%–5.0% before Medicare cap, admissions growth of 4.0%–5.0%, and adjusted EBITDA margin of 14.0%–15.0% before cap.
- For Roto-Rooter, management forecast full-year revenue growth of 6.0%–7.0% and adjusted EBITDA margin of 19.5%–20.0%, citing water-restoration expansion and approximately 1.0% higher job pricing. Management expected operating income and cash flows to support operations and commitments for the foreseeable future.
- VITAS faces a False Claims Act action alleging improper Medicare billing and patient eligibility practices. The government seeks treble damages, statutory penalties, costs, and interest. VITAS answered the amended complaint in August 2015; Chemed said it could not reasonably estimate the probability or range of loss.
- Consolidated shareholder derivative suits were pending, with defendants’ renewed motion to dismiss. The company intends to defend the matters; it warned of potential defense costs, payments, management distraction, publicity, and possible material adverse effects.
- Costs related to the OIG investigation and related regulatory matters were $3.8 million for the first nine months, versus $1.6 million in 2014. The filing also identifies concentration risk: one vendor supplied more than 90% of VITAS pharmacy services.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether VITAS patient growth, payer mix, length of stay, and Medicare cap exposure remain consistent with the stated outlook.
- Developments in the False Claims Act and derivative litigation, including any change in the company’s ability to estimate potential losses.
- Whether Roto-Rooter water-restoration growth and forecast margins are sustained, and how much growth comes from acquisitions versus existing operations.
- The sustainability of cash-flow improvement, considering the company’s explanation that prior-year litigation payments and timing of disbursements affected comparisons.
- Exposure to floating interest rates, debt covenant headroom, repurchases, and the concentration of VITAS pharmacy services with its principal vendor.
Adjusted net income, adjusted EPS, and adjusted EBITDA are non-GAAP measures; the company cautions that they should not be viewed in isolation or as substitutes for GAAP results.