Chemed Corporation: Q3 2012 Form 10-Q
Reporting period: Three and nine months ended September 30, 2012; unaudited. Chemed operates VITAS, a hospice-care provider, and Roto-Rooter, a plumbing and drain-cleaning business. Dollar amounts below are in millions unless otherwise noted.
Financial results
| Metric | Q3 2012 | Q3 2011 | First 9 months 2012 | First 9 months 2011 |
|---|---|---|---|---|
| Revenue | $354.4 | $341.4 | $1,061.5 | $1,005.7 |
| Operating income | $36.0 | $41.3 | $110.5 | $107.7 |
| Net income | $20.8 | $21.9 | $62.6 | $60.3 |
| Diluted EPS | $1.07 | $1.04 | $3.23 | $2.82 |
| Adjusted EBITDA | $49.0 | $49.6 | $143.5 | $141.8 |
| Adjusted EBITDA margin | 13.8% | 14.5% | 13.5% | 14.1% |
Revenue grew 3.8% in Q3 and 5.5% for the nine-month period. Q3 net income fell 4.8%, while diluted EPS rose 2.9%, principally reflecting fewer shares outstanding. For nine months, net income rose 3.8% and diluted EPS rose 14.5%. Reported gross margin declined to 27.6% from 28.2% in Q3 and to 27.3% from 28.2% year to date.
- VITAS: Revenue was $268.0 million in Q3, up 5.9%, and $794.1 million for nine months, up 8.5%. Average daily census increased 4.5% in Q3 and 5.5% year to date. Growth reflected higher census, admissions and Medicare rate increases of approximately 2.5%. VITAS after-tax earnings rose 4.6% in Q3 and 7.5% year to date.
- Roto-Rooter: Revenue was $86.4 million in Q3, down 2.4%, and $267.4 million for nine months, down 2.4%. Lower job counts weighed on results; the Q3 decrease in segment after-tax earnings was 23.3%, and the nine-month decrease was 15.2%. Segment gross margin also declined, with management citing increased medical costs and lower revenue.
Cash, liquidity and debt
- Cash and cash equivalents were $69.3 million at September 30, 2012, versus $38.1 million at December 31, 2011. Accounts receivable rose to $101.2 million from $77.9 million.
- Nine-month operating cash flow was $77.3 million, down from $107.9 million. Management attributed the decline primarily to increased receivables and lower accounts payable. Capital expenditures were $26.5 million; cash used for acquisitions was $5.9 million.
- Long-term debt carrying value was $172.8 million, compared with $166.8 million at year-end; the convertible notes’ principal was $187.0 million. The filing reports no variable-rate debt outstanding at September 30.
- The $350 million revolving facility had approximately $320.8 million available, excluding its $150 million expansion feature; $29.2 million of standby letters of credit reduced availability. Chemed reported compliance with debt covenants and stated that liquidity was satisfactory for foreseeable needs.
- Dividends paid were $9.6 million for the first nine months. Treasury-stock purchases were $15.0 million, compared with $110.3 million in the prior-year period.
Outlook, risks and unusual items
- Management’s full-year 2012 outlook was VITAS revenue growth of 7.5% to 8.0% before Medicare cap, admissions growth of approximately 4.0% to 4.5%, and adjusted EBITDA margin of 14.5% to 15.0% before Medicare cap. Roto-Rooter expected revenue approximately 2.0% below the prior year, with job count down 3.0% to 4.0%, and adjusted EBITDA margin of 15.8% to 16.3%.
- VITAS derives more than 90% of service revenue from Medicare and Medicaid and faces extensive regulatory scrutiny. Ongoing government investigations and qui tam matters include allegations involving hospice eligibility, billing and patient records. The company said it could not estimate the timing or outcome, or whether losses were probable or estimable; investigation-compliance costs were not material in the periods presented.
- Other disclosed litigation includes wage-and-hour class actions and a securities class action related to VITAS. Chemed contests the claims and intends to defend them. Litigation may bring defense costs, management distraction and adverse publicity.
- VITAS reversed $2.6 million of previously recorded Medicare-cap liability in the first nine months based on improving admissions trends; ending liability was $0.4 million. The filing reports no Medicare-cap liability recorded in Q3.
- Roto-Rooter recorded $1.1 million of pretax HVAC shutdown costs, mainly severance and lease termination, after deciding to close its remaining Baltimore HVAC business. The costs were included in other operating expenses and the operation remained in continuing operations.
- Four Roto-Rooter acquisitions cost $5.9 million in cash and were not material to reported results. Management cautioned that forward-looking statements are subject to risks and uncertainty; the filing reported no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether VITAS’s growth and guidance assumptions remain achievable, particularly given Medicare/Medicaid dependence, reimbursement rules and Medicare-cap estimates.
- Developments in VITAS government investigations and related litigation, including any eventual financial exposure; the filing provides no clear estimate of potential losses.
- Whether the receivables increase and lower operating cash flow reflect timing alone or indicate a sustained change in collections and cash conversion.
- Whether Roto-Rooter can stabilize job counts, segment margins and earnings after year-to-date declines.
- The effect of convertible-note accounting and potential dilution, and the sustainability of share repurchases and dividends alongside investment needs.