Chemed Corporation — Q2 2010 Form 10-Q
Reporting period: Three and six months ended June 30, 2010; comparisons are with the corresponding 2009 periods. Chemed operates VITAS hospice care and Roto-Rooter plumbing and drain-cleaning services. Financial amounts below are in millions unless stated otherwise.
Financial results and liquidity
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $315.0 | $295.3 | $623.8 | $590.2 |
| Operating income | $33.9 | $27.9 | $68.3 | $62.7 |
| Net income | $18.9 | $17.3 | $38.2 | $36.6 |
| Diluted EPS | $0.82 | $0.76 | $1.66 | $1.61 |
| Adjusted EBITDA | $44.9 | $43.7 | $88.0 | $85.9 |
| Adjusted EBITDA margin | 14.3% | 14.8% | 14.1% | 14.6% |
- Gross margin was 29.0% in both Q2 and the first half, versus 29.8% in each 2009 comparable period. The filing attributes the decline to VITAS labor and compliance costs, start-up expenses at new inpatient units, and Roto-Rooter job mix and, in Q2, a casualty-insurance adjustment.
- Six-month operating cash flow was $20.3 million, down from $43.1 million. The main factor was a $53.2 million increase in receivables, primarily at VITAS, related to Medicare payment timing and refunds of prior-year overpayments. Capital expenditures were $11.9 million; cash declined $3.3 million to $109.1 million.
- At June 30, current assets were $244.0 million and current liabilities $141.9 million. Long-term debt carrying value was $155.6 million; the convertible notes had $187.0 million face value. Chemed reported $146.7 million of available revolving credit, after letters of credit, and compliance with debt covenants.
Changes versus prior comparable periods
- Q2 revenue rose 6.7%, net income 9.3%, diluted EPS 7.9%, and adjusted EBITDA 2.8%. First-half revenue increased 5.7%, net income 4.4%, diluted EPS 3.1%, and adjusted EBITDA 2.4%; adjusted EBITDA margin declined in both comparisons.
- VITAS revenue grew 7.3% in Q2 and 7.1% year to date, supported by higher average daily census, admissions, and Medicare rate increases. Roto-Rooter revenue grew 5.2% in Q2 and 2.2% year to date; higher prices and favorable mix were partly offset by fewer jobs, particularly drain-cleaning work in the first half.
- VITAS generated most of the increase in segment after-tax earnings. Roto-Rooter after-tax earnings were nearly flat in Q2 and down 2.1% for the first half.
- Prior-year results included $3.4 million of Q2 and $4.0 million of first-half pretax expenses for a contested proxy solicitation; none were recorded in 2010. Prior-year other income also included larger deferred-compensation investment gains and, for the first half, a $1.2 million gain on settlement of company-owned life insurance.
Outlook, commentary and risks
- For full-year 2010, management expected VITAS revenue growth of 6%–7% before Medicare cap, admissions growth of 3%–4%, and adjusted EBITDA margin of 15.0%–15.5% before Medicare cap. Roto-Rooter revenue growth was forecast at 4%–4.5%, with adjusted EBITDA margin of 17.5%–18.0%; management expected job counts to decline 2%–4% amid pricing and mix improvements.
- Management said operating income and cash flows should be sufficient for foreseeable operating needs and commitments, and liquidity and capital sources were satisfactory. These are forward-looking estimates and are not assurances of results.
- VITAS derives more than 90% of service revenue from Medicare and Medicaid. Risks include reimbursement policy changes, Medicare cap exposure, medical reviews that delay billing, and the ongoing federal and Texas investigations into hospice billing. The company said it believes it is materially compliant but could not predict investigation outcomes or impacts.
- Roto-Rooter and Chemed face a newly conditionally certified nationwide service-technician wage-and-overtime class action; potential liability was not estimable. VITAS also faces a California employment class action; class certification was denied in 2009, and potential liability was not estimable.
- Chemed reported no variable-rate debt outstanding, no material change in previously disclosed risk factors, and effective disclosure controls. The 1.875% convertible notes may affect future diluted EPS if share-price thresholds are met.
Important facts for investors to verify
- Whether the VITAS receivables increase reflects temporary payment timing and how quickly collections and prior-year overpayment refunds normalize.
- VITAS census, admissions, reimbursement, Medicare cap estimates, and the effects of focused medical reviews and regulatory investigations.
- Whether margin pressure from staffing, compliance, inpatient-unit start-up costs, and Roto-Rooter job mix persists against management’s segment outlook.
- Cash conversion and capital allocation, including repurchases, dividends, capital expenditures, and availability under the revolving facility.
- Developments in the employment lawsuits and government investigations, as well as potential dilution from the convertible notes and warrants.