Chemed Corporation — Q3 2010 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2010; unaudited. Chemed operates VITAS hospice care and Roto-Rooter plumbing and drain-cleaning services. Comparisons are with the same 2009 periods unless noted. Dollar amounts below are in millions except per-share data.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Revenue | $320.5 | $296.8 | $944.3 | $887.0 |
| Operating income | $36.8 | $32.8 | $105.1 | $95.5 |
| Net income | $21.0 | $19.2 | $59.2 | $55.8 |
| Diluted EPS | $0.91 | $0.84 | $2.57 | $2.46 |
| Adjusted EBITDA (non-GAAP) | $46.3 | $43.5 | $134.2 | $129.4 |
| Adjusted EBITDA margin | 14.4% | 14.7% | 14.2% | 14.6% |
- Revenue increased 8.0% in Q3 and 6.5% year to date; net income rose 9.3% and 6.1%, respectively. Adjusted EBITDA increased 6.4% and 3.8%.
- Gross margin declined to 28.9% from 29.6% in Q3 and to 29.0% from 29.7% for the nine months.
- VITAS revenue was $234.0 million in Q3 and $683.5 million year to date, up 7.8% and 7.3%. Growth reflected higher average daily census (6.1% Q3; 5.6% year to date), admissions, and Medicare rate increases of about 1.3%.
- Roto-Rooter revenue was $86.5 million in Q3 and $260.7 million year to date, up 8.5% and 4.2%. Price and mix gains were partly offset by fewer jobs over the nine-month period. Segment after-tax earnings increased at VITAS but declined at Roto-Rooter in both comparative periods.
- Operating cash flow was $58.0 million, down from $80.5 million. Management attributed the decline mainly to a $59.5 million increase in accounts receivable, primarily VITAS Medicare-payment timing and refunds of prior-year overpayments. Capital expenditures were $19.1 million.
- At September 30, cash was $137.5 million; current assets were $276.0 million and current liabilities $152.3 million. Long-term debt had a $157.4 million carrying value and $187.0 million principal amount. The company reported $146.8 million of available revolving credit, excluding a $100 million expansion feature, and compliance with debt covenants.
Changes, outlook, and management commentary
- VITAS gross margin fell to 23.1% in Q3 (23.4% prior year) and 22.9% year to date (23.4%). The filing cites higher labor costs for admissions and Medicare compliance and start-up costs at new inpatient units. Roto-Rooter gross margin also declined, partly due to a mix shift toward excavation work and an unfavorable medical-insurance adjustment in Q3.
- Management’s 2010 outlook: VITAS revenue growth of 7.5%–8.2% before Medicare cap and BNAF effects, admissions growth of 4.0%–5.0%, and Adjusted EBITDA margin of 15.3%–15.6% before Medicare cap. Roto-Rooter revenue growth was estimated at 4.5%–5.5%, with Adjusted EBITDA margin of 17.5%–18.0%. Management expected operating income and cash flows to support operations and commitments.
- VITAS receives more than 90% of its service revenue from Medicare and Medicaid. The filing describes annual reimbursement adjustments and the scheduled phase-out of the Budget Neutrality Adjustment Factor. The nine-month 2009 comparison included $1.95 million of retroactive BNAF revenue not present in 2010; 2010 included a net $1.7 million reversal of previously recorded projected Medicare-cap liabilities.
- Other income was $0.2 million in Q3 and $0.4 million year to date, compared with $1.7 million and $4.8 million in 2009. Prior-year results benefited from larger deferred-compensation investment gains and, year to date, a $1.2 million life-insurance settlement gain. 2009 also included $4.0 million of pretax contested-proxy costs.
- Other earnings items include noncash convertible-note discount amortization, stock-based compensation, long-term incentive compensation, and legal costs. The notes carry a 1.875% coupon; the reported effective interest rate after discount accounting is approximately 6.875%.
Risks, contingencies, and other matters
- A federal wage-and-overtime case against Roto-Rooter and Chemed was conditionally certified as a nationwide class, subject to exclusions for employees with arbitration agreements. The company contests the allegations and cannot estimate potential liability.
- VITAS faces ongoing federal and Texas investigations concerning hospice billing and compliance. Additional subpoenas and civil investigative demands were received in 2010. The company says it believes it is materially compliant but cannot predict the outcome or potential impact.
- A California VITAS employment class action remains unresolved; the trial court denied class certification in December 2009. The company cannot estimate potential liability in either employment case.
- VITAS had $5.6 million of unbilled revenue related to programs undergoing focused medical review. The company records provisions for potential denials. Deferred compensation investments and liabilities are exposed to market-value changes.
- Management said disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. No material changes to previously reported risk factors were disclosed.
Investor facts to verify
- Whether the substantial accounts-receivable increase and Medicare-payment timing normalize, and how that affects operating cash flow.
- VITAS census, admissions, reimbursement, Medicare-cap exposure, and the financial effects of focused medical reviews and government investigations.
- Whether gross-margin pressure and Roto-Rooter job-count trends improve while the company pursues its stated full-year segment outlook.
- The potential financial exposure, timing, and development of the employment litigation and hospice billing investigations; liabilities are not currently estimable.
- Adjusted EBITDA and its margins are non-GAAP measures; review the filing’s reconciliation and adjustments when comparing performance.