Chemed Corporation — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; unaudited. Chemed operates VITAS hospice care and Roto-Rooter plumbing and drain-cleaning services. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $341.4 | $320.5 | $1,005.7 | $944.3 |
| Operating income | $41.3 | $36.8 | $107.7 | $105.1 |
| Net income | $21.9 | $21.0 | $60.3 | $59.2 |
| Diluted EPS | $1.04 | $0.91 | $2.82 | $2.57 |
| Adjusted EBITDA and margin | $49.6; 14.5% | $46.3; 14.4% | $141.8; 14.1% | $134.2; 14.2% |
Revenue increased 6.5% in both the quarter and nine-month period. Q3 net income rose 4.3%; nine-month net income rose 1.8%. Diluted EPS grew faster, by 14.3% and 9.7%, respectively, in part because of fewer average shares outstanding following repurchases. Adjusted EBITDA is a non-GAAP measure.
- Segments: Q3 VITAS revenue was $252.9 million, up 8.1%; Roto-Rooter revenue was $88.5 million, up 2.3%. Nine-month growth was 7.0% for VITAS and 5.1% for Roto-Rooter. Q3 after-tax segment earnings were $21.0 million for VITAS and $8.0 million for Roto-Rooter.
- Margins: Consolidated gross margin declined to 28.2% from 28.9% in Q3 and to 28.2% from 29.0% year to date. VITAS margins fell amid higher admissions and compliance labor costs and start-up expenses at new operations; Roto-Rooter Q3 gross margin improved to 45.0% from 44.6%.
- Cash flow: Nine-month operating cash flow was $107.9 million, versus $58.0 million. Capital expenditures were $23.5 million, versus $19.1 million; operating cash flow less capital expenditures was $84.5 million. Cash and equivalents fell to $21.3 million from $49.9 million, largely amid substantial share repurchases.
- Liquidity and debt: Current assets were $168.6 million and current liabilities $160.8 million at September 30. Long-term debt carrying value was $164.8 million, representing $187.0 million principal of 1.875% convertible notes less unamortized discount. Chemed reported no variable-rate debt outstanding, was in compliance with covenants, and had approximately $320.5 million of available revolving credit, after $29.5 million of standby letters of credit; a further $150 million expansion feature was excluded.
Changes, outlook, and risks
- VITAS Q3 revenue growth reflected 6.2% higher average daily census, admissions up 2.7%, average length of stay up 2.4%, and Medicare rate increases of about 2.1%. Roto-Rooter growth reflected higher job count and contractor operations; for the first nine months, plumbing job count rose 3.6% and average price per job rose 2.6%.
- Management’s 2011 outlook: VITAS revenue growth of 7.5%–8.0% before Medicare cap, admissions growth of about 5.0%–5.5%, and adjusted EBITDA margin of 15.2%–15.7% before Medicare cap. Roto-Rooter revenue growth was forecast at 4.5%–5.5%, with adjusted EBITDA margin of 17.0%–18.0%. Management expected operating income and cash flows to support operations and commitments in the foreseeable future.
- Chemed repurchased 1.87 million shares for $110.3 million during the first nine months, at a weighted-average price of $60.30. A February 2011 program authorized $100 million; $12.6 million remained under that program at quarter-end. Nine-month dividends were $9.4 million.
- VITAS faces Medicare/Medicaid scrutiny, including a DOJ/OIG investigation and three qui tam complaints still under seal; the government had not decided whether to intervene. A separate earlier investigation continued. Chemed believes it complies with applicable rules but cannot estimate potential losses. More than 90% of VITAS service revenue came from Medicare and Medicaid.
- Employment class actions involving Roto-Rooter technicians and VITAS personnel remain contested; potential losses could not be estimated. Defense costs and business distraction may adversely affect Chemed.
- Q3 other expense included a $2.0 million market-value loss on deferred-compensation trust assets. Reported after-tax items reducing earnings totaled $3.3 million in Q3 and $11.4 million for nine months, including stock compensation, convertible-debt accounting effects, litigation and investigation costs, and acquisition-related costs. The March refinancing increased interest expense year over year.
Key facts for investors to verify
- Whether VITAS census and admissions growth can continue while labor, start-up, Medicare compliance, and Medicare-cap pressures affect margins.
- Developments in the VITAS government investigations and qui tam matters, including any intervention, loss estimate, or change in reimbursement exposure.
- Progress and potential exposure in the employment class actions, for which the filing provides no clear estimate of loss.
- Cash and liquidity after the large repurchases, and the company’s future allocation among buybacks, dividends, acquisitions, and debt.
- Performance against the segment-specific 2011 outlook; these are forward-looking estimates, not guarantees.