Chemed Corporation — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012; unaudited. Chemed operates VITAS, a hospice-care provider, and Roto-Rooter, a plumbing and drain-cleaning business. Unless noted, amounts below are in millions of dollars.
Financial performance
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $354.2 | $333.4 | $707.1 | $664.3 |
| Operating income | $39.5 | $35.8 | $74.5 | $66.4 |
| Net income | $21.3 | $20.3 | $41.7 | $38.4 |
| Diluted EPS | $1.10 | $0.94 | $2.16 | $1.78 |
| Adjusted EBITDA (non-GAAP) | $48.2 | $46.7 | $94.5 | $92.3 |
| Adjusted EBITDA margin | 13.6% | 14.0% | 13.4% | 13.9% |
| Operating cash flow | Not presented quarterly | $54.7 | $51.1 |
- Q2 revenue rose 6.2%; net income increased 4.9% and diluted EPS increased 17.0%. For the first half, revenue rose 6.4%, net income 8.7%, and diluted EPS 21.3%. The EPS increase also reflected a lower weighted-average share count.
- VITAS revenue increased 9.1% in Q2 and 9.9% for the first half, supported by 6.0% growth in average daily census, higher admissions, and approximately 2.5% Medicare price increases. Roto-Rooter revenue declined 1.4% and 2.4%, respectively, as lower job counts offset pricing and mix gains.
- Consolidated gross margin declined to 27.3% from 28.1% in Q2 and to 27.2% from 28.2% for the first half. Management cited higher VITAS labor and compliance costs and start-up costs at new operations, plus higher Roto-Rooter medical costs and lower revenue.
- Cash and cash equivalents were $60.0 at June 30, versus $38.1 at December 31, 2011. Current assets were $178.1 and current liabilities $142.6. First-half operating cash flow was $54.7; capital expenditures were $18.5; investing cash outflow was $19.6.
- Long-term debt carrying value was $170.8, against $187.0 principal on the 1.875% convertible notes. The company reported no variable-rate debt outstanding, compliance with debt covenants, and $320.6 of available revolving-credit capacity, excluding a $150 expansion feature. Standby letters of credit of $29.4 reduce available capacity.
Changes, outlook and management commentary
- VITAS drove consolidated growth; Roto-Rooter’s revenue and after-tax earnings declined. Segment after-tax earnings were $20.4 for VITAS and $8.1 for Roto-Rooter in Q2, versus $18.6 and $9.1 a year earlier.
- Share repurchases totaled 199,900 shares for $12.8 in the first half; dividends paid were $6.2. The quarterly dividend per share was $0.16, versus $0.14 a year earlier.
- For full-year 2012, VITAS forecast revenue growth of 7.5%–9.0% before Medicare cap, admissions growth of approximately 3.5%–4.0%, and adjusted EBITDA margin of 14.5%–15.0% before Medicare cap. Roto-Rooter forecast revenue approximately flat year over year, with job count down 2.0%–4.0%, and adjusted EBITDA margin of 16.0%–17.0%.
- Management said operating income and cash flows should be sufficient for foreseeable needs. Adjusted EBITDA is a non-GAAP measure; the company cautions it should not be viewed as a substitute for GAAP results.
- VITAS reversed $2.6 of previously recorded Medicare-cap liability as admissions trends improved; ending liability was $0.4. VITAS had $0.5 of unbilled revenue under focused medical review at June 30. More than 90% of VITAS revenue came from Medicare and Medicaid.
Risks and unusual items
- VITAS received a June 2012 HHS OIG subpoena concerning possible improper Medicare and Medicaid claims for headquarters and Southern California programs. A Florida Attorney General subpoena was received in July. The filing says timing, outcomes, and potential liabilities cannot be estimated.
- VITAS also faced ongoing government investigations and qui tam claims involving hospice eligibility and billing, including matters relating to Texas and other programs. The company could not estimate potential losses.
- A securities class action alleges failure to disclose an alleged scheme involving ineligible hospice patients; Chemed says it believes the claims are without merit and will defend vigorously. Separate employment-related class actions are also pending; potential liabilities are not estimable.
- Q2 results included $3.1 of after-tax items reducing earnings, including stock-option expense, convertible-debt accounting effects, and litigation-related expenses. Deferred-compensation trust market-value losses also affected quarterly other expense.
- VITAS relied on Omnicare for over 90% of pharmacy services used. The company identified no material changes to previously disclosed risk factors and reported effective disclosure controls.
Investor verification points
- Track VITAS admissions, census, patient eligibility and Medicare-cap exposure, and developments in the OIG and state investigations.
- Monitor Roto-Rooter job counts, pricing, and progress toward its flat-revenue outlook.
- Reconcile adjusted EBITDA and forecast margins to GAAP results, and assess the margin decline and rising operating costs.
- Review cash conversion, capital spending, share repurchases, convertible-note dilution terms, and remaining credit availability.
- Follow litigation developments and potential financial exposure, which the filing does not quantify.