Chemed Corporation — Q1 2013 Form 10-Q
Business context and period. For the three months ended March 31, 2013, Chemed operated through VITAS, its hospice-care business, and Roto-Rooter, its plumbing and drain-cleaning business. Financial amounts below are in U.S. dollars; millions are used unless otherwise noted. The statements are unaudited.
Key financial results
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $366.6 million | $352.9 million | +3.9% |
| Operating income | $38.9 million | $35.0 million | +11.1% |
| Net income | $22.3 million | $20.4 million | +9.0% |
| Diluted EPS | $1.17 | $1.06 | +10.4% |
| Adjusted EBITDA | $51.3 million | $46.3 million | +10.7% |
| Adjusted EBITDA margin | 14.0% | 13.1% | +0.9 percentage points |
| Operating cash flow | $8.1 million | $10.4 million | Down $2.2 million |
| Capital expenditures | $5.4 million | $12.0 million | Down $6.6 million |
Consolidated gross margin was 27.9%, versus 27.1%. Operating margin was approximately 10.6%, compared with 9.9%; net margin was approximately 6.1%, compared with 5.8%. Adjusted EBITDA is a non-GAAP measure.
Segments. VITAS revenue rose 4.0% to $271.3 million and after-tax earnings rose 2.6% to $20.1 million. Roto-Rooter revenue increased 3.5% to $95.3 million and after-tax earnings rose 28.4% to $9.6 million. Roto-Rooter’s gross margin improved to 46.3% from 43.7%; VITAS’s gross margin edged up to 21.4% from 21.2%.
Financial position and liquidity
- At March 31, cash and cash equivalents were $73.0 million; current assets were $236.2 million and current liabilities $160.9 million (current ratio approximately 1.47).
- Long-term debt carrying value was $177.0 million, representing $187.0 million principal of convertible notes less unamortized discount. Cash exceeded carrying debt by approximately $104.0 million.
- The company replaced its credit agreement in January with a five-year $350 million revolving facility, currently priced at LIBOR plus 125 basis points, with a $150 million expansion feature. After $29.2 million of standby letters of credit, approximately $320.8 million remained available, excluding the expansion feature. Chemed reported compliance with all covenants.
- Operating cash flow was pressured by a $36.7 million increase in accounts receivable, partly offset by a $10.1 million increase in income taxes payable. Management attributed balance-sheet movements primarily to timing of receipts, tax payments, and incentive-compensation payments.
- Quarterly dividends were $0.18 per share, compared with $0.16. No shares were repurchased during the quarter; the board added $100 million to the repurchase authorization, with $114.7 million remaining.
Changes, outlook, and management commentary
- VITAS revenue growth reflected 5.3% growth in average daily census, 5.0% more admissions, approximately 0.9% Medicare rate increases, and increased discharges. Roto-Rooter growth included a 2.2% increase in price and mix; plumbing job count declined while drain-cleaning jobs increased.
- Effective April 1, 2013, Medicare reduced hospice reimbursement rates by 2.0%, affecting approximately 91.2% of VITAS revenue. Management forecast VITAS full-year revenue growth, before Medicare cap effects, of 4.5%–5.5%, admissions growth of approximately 5.0%–6.0%, and Adjusted EBITDA margin of 13.8%–14.2%.
- Roto-Rooter forecast 2013 revenue growth of 2.5%–4.0%, including estimated job-count growth of 0.1%–0.5%, and Adjusted EBITDA margin of 18.0%–19.5%. Management said anticipated operating income and cash flows should fund operations and commitments for the foreseeable future.
- VITAS reversed $0.873 million of previously recorded projected Medicare cap liability as admissions trends improved; the reported cap liability was $0.388 million at quarter-end, versus $1.261 million at year-end 2012.
- Unusual quarterly items included $1.039 million of VITAS OIG-investigation expenses, $0.612 million of long-term incentive compensation, and a $0.465 million pretax loss on extinguishment of debt. Interest expense increased 13.2%, principally due to convertible-note discount amortization and costs related to the new credit agreement.
Risks, contingencies, and other notable matters
- VITAS operates in a heavily regulated sector and faces multiple government inquiries, subpoenas, and qui tam or other lawsuits concerning hospice eligibility, billing, and care practices. The company said timing, outcomes, and potential losses could not be estimated; it contests the claims. Investigation-compliance costs were not material in periods presented, but defense costs, management distraction, and publicity may adversely affect the company.
- More than 90% of VITAS revenue was from Medicare and Medicaid. The reimbursement reduction effective April 1 and potential Medicare cap adjustments therefore warrant attention. VITAS also reported approximately $1.1 million of unbilled revenue under patient-file reviews at quarter-end.
- VITAS relied on Omnicare for over 90% of its pharmacy services; purchases were $9.6 million for the quarter. The agreements renew annually and may be terminated with notice.
- The convertible notes’ fair value was approximately $205.5 million versus a $187.0 million face amount. Chemed reported no variable-rate debt outstanding at quarter-end. Disclosure controls were assessed as effective, and the filing reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether VITAS can sustain census and admissions growth while absorbing the 2.0% Medicare reimbursement reduction and managing Medicare cap exposure.
- Progress and potential financial impact of the ongoing VITAS investigations and litigation; the filing does not provide a clear estimate of possible losses.
- Whether accounts-receivable growth and weaker year-over-year operating cash flow reverse as collections and payment timing normalize.
- Performance against each segment’s full-year revenue and Adjusted EBITDA margin outlook, noting that these are management estimates and Adjusted EBITDA is non-GAAP.
- Debt terms, covenant compliance, and capital allocation decisions, including use of the remaining share-repurchase authorization.