Chemed Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. Chemed operates VITAS, a hospice-care business, and Roto-Rooter, a plumbing, drain-cleaning and water-restoration business. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $405.9 | $390.4 | +4.0% |
| Operating income | $41.5 | $44.4 | −6.6% |
| Net income | $29.8 | $24.8 | +20.1% |
| Diluted EPS | $1.78 | $1.45 | +22.8% |
| Adjusted net income (non-GAAP) | $30.5 | $27.8 | +9.9% |
| Adjusted diluted EPS (non-GAAP) | $1.82 | $1.62 | +12.3% |
| Adjusted EBITDA (non-GAAP) | $59.8 | $54.5 | +9.8% |
| Adjusted EBITDA margin (non-GAAP) | 14.7% | 14.0% | +0.7 percentage points |
Consolidated gross margin rose to 29.7% from 28.7%; VITAS margin was 21.5% versus 21.0%, and Roto-Rooter margin was 48.6% versus 47.6%. Operating income nevertheless declined as SG&A and other costs increased. Reported net income benefited from a $3.7 million tax benefit under newly adopted stock-compensation accounting guidance; the reported effective tax rate fell to 30.5% from 38.9%. The company reported basic EPS of $1.84 and diluted EPS of $1.78, and paid dividends of $0.26 per share.
Segments and material changes
- VITAS: Revenue increased 1.7% to $282.3 million; after-tax earnings rose 7.9% to $20.6 million. Average daily census increased 3.6%, and days of care increased 2.5%; reimbursement rates rose about 1.6%. Acuity mix reduced revenue growth by 2.4%, and one fewer calendar day reduced it by 1.1%. Continuous-care and inpatient days declined 10.9% and 11.1%, respectively.
- Roto-Rooter: Revenue increased 9.5% to $123.5 million; after-tax earnings rose 12.3% to $14.6 million. Water-restoration revenue grew 45.1%, while plumbing revenue rose 6.4%. Plumbing price and service mix improved, partly offset by lower job count.
- Cash from operations increased to $68.8 million from $7.2 million. Management attributed the increase mainly to receivables timing, including a $41.7 million Medicare payment received on March 31; it cautioned that federal payment timing can shift cash flow between periods.
- Capital expenditures were $9.0 million, and cash increased to $47.0 million from $15.3 million at year-end. The company spent $54.3 million to repurchase 300,000 shares; the board authorized an additional $100 million for repurchases, leaving $95.9 million authorized at March 31.
Debt, liquidity and financial position
Total debt was $146.9 million at March 31, up from $108.8 million at December 31, 2016, primarily reflecting revolving-credit borrowings used mainly to fund share repurchases. Debt comprised $65.0 million drawn on the revolver and an $81.9 million term loan. The company reported $246.3 million of available revolving capacity after standby letters of credit, and said it was in compliance with debt covenants. The credit facility’s rate was LIBOR plus 113 basis points. The company cited sufficient liquidity and capital for foreseeable needs.
Outlook, risks and unusual items
- 2017 guidance: VITAS expects revenue growth of 4.0%–5.0% before Medicare cap, admissions and average daily census growth of approximately 3.0%–4.0%, and adjusted EBITDA margin of 14.5%–15.0%. Guidance includes $3.75 million for Medicare cap billing limitations. Roto-Rooter expects revenue growth of 3.0%–4.0% and adjusted EBITDA margin of 21.5%–22.0%.
- VITAS is appealing CMS’s methodology for calculating the Medicare cap. The company says $2.1 million was demanded for three programs covering 2013–2015; it had not reserved $1.9 million of the potential exposure as of March 31. No Medicare cap expense was recorded in either comparative quarter.
- VITAS recorded $0.9 million of costs to close three Alabama programs, mainly severance and a leasehold-improvement write-off. The company also recorded $2.2 million of costs related to the OIG investigation and related regulatory matters.
- The government’s False Claims Act case against VITAS remains in discovery and alleges improper Medicare hospice billing; the company cannot estimate the probability or range of loss. A shareholder/derivative matter and two California employment class-action lawsuits are also pending; outcomes and potential losses are not estimable. Chemed intends to defend the matters, but warns that costs, payments, management distraction and publicity could adversely affect it.
- VITAS relies heavily on government reimbursement: more than 90% of segment revenue came from Medicare and Medicaid. One provider accounted for approximately 90% of VITAS pharmacy-services purchases in the quarter. Variable-rate debt exposes the company to interest-rate changes.
- The filing reports no material changes to previously disclosed risk factors. Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether VITAS census, reimbursement, acuity mix and service-line trends support the stated 2017 guidance, and whether Medicare cap exposure changes.
- How much of the Q1 operating-cash-flow increase reflects sustainable cash generation versus payment timing.
- The effects of the $3.7 million stock-compensation tax benefit and deferred-compensation market-value movements when assessing underlying earnings.
- Developments in the False Claims Act, regulatory and employment litigation matters, including any measurable loss exposure.
- Debt and repurchase activity, covenant headroom, and the impact of variable interest rates on financing costs.