Chemed Corporation — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; financial statements are unaudited. Chemed operates VITAS, a hospice-care provider, and Roto-Rooter, a plumbing and drain-cleaning business. Amounts below are in U.S. dollars; financial figures are in millions unless noted.
Financial performance and liquidity
| Metric | Q1 2012 | Q1 2011 / prior period |
|---|---|---|
| Revenue | $352.9 | $330.9; up 6.7% |
| Operating income | $35.0 | $30.5 |
| Net income | $20.4 | $18.1; up 12.9% |
| Diluted EPS | $1.06 | $0.84; up 26.2% |
| Adjusted EBITDA (non-GAAP) | $46.3; 13.1% of revenue | $45.6; 13.8% of revenue |
| Operating cash flow | $10.4 | $48.5 |
| Capital expenditures | $12.0 | $6.2 |
Consolidated gross margin declined to 27.1% from 28.2%. VITAS gross margin was 21.2% versus 21.8%; Roto-Rooter was 43.7% versus 44.2%. Cash and cash equivalents were $34.2 million at March 31, down from $38.1 million at year-end. Current assets were $177.3 million and current liabilities $155.2 million.
Long-term debt had a $168.8 million carrying value ($187.0 million principal) and consisted of 1.875% convertible notes; the reported effective interest rate was approximately 6.875%. Chemed reported no variable-rate debt outstanding and was in compliance with debt covenants. Its revolving facility had approximately $320.6 million available, excluding a $150 million expansion feature; $29.4 million of standby letters of credit reduced availability.
Business results and changes from the prior year
- VITAS: Revenue increased 10.7% to $260.8 million; after-tax segment earnings rose to $19.6 million from $18.1 million. Average daily census increased 6.1%, admissions 3.3%, and average length of stay 4.4%; Medicare reimbursement rates rose approximately 2.5%. Management attributed lower gross margin to higher admission and compliance staffing costs and start-up costs at new operations and inpatient units.
- Roto-Rooter: Revenue declined 3.3% to $92.1 million; after-tax segment earnings fell to $7.5 million from $8.5 million. Job count fell 6.1%, partly offset by a 2.5% price and mix increase.
- Higher consolidated revenue and net income were partly offset by lower Roto-Rooter results and margin pressure. Diluted EPS growth also benefited from fewer weighted-average shares outstanding. Interest expense rose 11.5%, which management attributed to the 2011 debt refinancing.
- Operating cash flow fell by $38.2 million, primarily because accounts receivable increased $34.9 million, partly offset by higher income-tax-related cash flows. Accounts receivable on the balance sheet rose $32.7 million from year-end, which management attributed to payment timing.
Outlook, risks and unusual items
- 2012 outlook: VITAS expected revenue growth of 5%–8% before Medicare cap, admissions growth of approximately 2.5%–4%, and adjusted EBITDA margin of 15.0%–15.5% before Medicare cap. Roto-Rooter expected revenue growth of 2%–4% and adjusted EBITDA margin of 16.5%–17.5%; job count was forecast from down 1% to up 1%. Management expected operating income and cash flows to support operations and foreseeable commitments. These are forward-looking estimates, not guarantees.
- VITAS reversed $2.577 million of previously recorded Medicare-cap liability after improving admissions trends; the remaining cap liability was $0.388 million at March 31. Medicare cap estimates and focused medical reviews can affect recognized revenue and receivables. VITAS reported approximately $0.838 million of unbilled revenue related to programs under focused medical review.
- VITAS faces federal and state investigations and qui tam matters concerning hospice eligibility and billing, as well as a securities class action alleging related nondisclosure. The company contests the allegations, says it believes it complies with applicable rules, and cannot predict outcomes or estimate potential liability for key matters.
- Other contested class actions involve Roto-Rooter technician compensation and alleged unnecessary excavation, and VITAS employment practices. Potential liability for these matters is not clearly estimable in the filing.
- VITAS relies on Omnicare for more than 90% of its pharmacy services; purchases were $10.0 million in the quarter. This supplier concentration is a business risk.
- Q1 included a $0.415 million Roto-Rooter acquisition, reported as immaterial to results. Other notable items included stock-option expense and noncash convertible-debt accounting costs; the filing also reports deferred-compensation trust market-value gains in other income.
Key facts for investors to verify
- Whether VITAS census, admissions, length-of-stay trends, Medicare-cap estimates, and compliance reviews support the stated growth outlook.
- How receivables and operating cash flow develop after the quarter’s substantial working-capital use.
- Whether Roto-Rooter job volumes recover and segment margins stabilize.
- Developments, possible financial exposure, and disclosure implications of the VITAS investigations and related litigation; the filing does not provide a clear estimate of potential liability.
- The assumptions and reconciliation behind adjusted EBITDA and management’s segment guidance, which are non-GAAP or forward-looking measures.
- Continued covenant compliance, convertible-note dilution implications, and actual availability under the revolving credit facility.