Chemed Corporation (10-Q): Quarter Ended September 30, 2014
Business context and reporting period
Chemed operates VITAS, a hospice-care provider, and Roto-Rooter, a plumbing and drain-cleaning business. This unaudited filing compares the third quarter and first nine months of 2014 with the same 2013 periods; balance-sheet figures compare September 30, 2014 with December 31, 2013. Amounts below are in millions except per-share data.
Financial and operating performance
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $358.4 | $340.9 | $1,076.9 | $1,064.7 |
| Operating income | $40.2 | $29.2 | $118.4 | $94.0 |
| Net income | $24.6 | $17.4 | $69.5 | $54.3 |
| Diluted EPS | $1.39 | $0.94 | $3.87 | $2.89 |
| Adjusted net income (non-GAAP) | $26.1 | $25.1 | $76.4 | $78.5 |
| Adjusted diluted EPS (non-GAAP) | $1.48 | $1.36 | $4.28 | $4.17 |
| Adjusted EBITDA (non-GAAP) | $50.9 | $49.7 | $150.8 | $154.0 |
| Adjusted EBITDA margin (non-GAAP) | 14.2% | 14.6% | 14.0% | 14.5% |
Q3 revenue rose 5.1%: VITAS revenue increased 4.5% to $265.4 million and Roto-Rooter increased 7.0% to $93.0 million. Nine-month revenue grew 1.1%, with VITAS approximately flat and Roto-Rooter up 4.1%. Consolidated gross margin was 28.4% in both nine-month periods, but slipped to 28.4% from 28.7% in Q3.
Reported net income growth reflects, in significant part, 2013 litigation settlement charges that did not recur in 2014. Q3 net income rose 41.0%, while adjusted net income rose 3.8%; for nine months, reported net income rose 28.0% while adjusted net income declined 2.7%. The effective tax rate was 38.4% for Q3 and 38.7% year to date, versus 32.0% and 36.8%, respectively, primarily because a 2013 tax benefit did not recur. Q3 diluted EPS also benefited from fewer average shares outstanding.
Segment after-tax earnings were $21.6 million for VITAS and $9.8 million for Roto-Rooter in Q3, compared with $14.6 million and $8.2 million, respectively, in Q3 2013. For nine months, VITAS earned $60.6 million versus $55.2 million and Roto-Rooter $30.6 million versus $19.2 million.
Cash flow, balance sheet and capital
- Operating cash flow for the first nine months was $51.0 million, down from $135.9 million. Management attributed the decline mainly to a $50.0 million increase in receivables and lower accrued legal liabilities. Capital expenditures were $31.7 million, versus $18.9 million.
- Cash was $18.6 million at September 30, down $65.9 million from year-end. Accounts receivable increased $40.6 million to $132.3 million, which management attributed to payment timing.
- Total debt was $173.6 million: $74.8 million drawn on the revolver and $98.8 million on the term loan. Cash less debt was approximately $155.0 million. The company had $238.3 million of available revolving capacity after $36.9 million of standby letters of credit; it reported compliance with debt covenants.
- Chemed replaced its prior credit agreement in June with a five-year $350 million revolving facility and a $100 million term loan. The floating rate was LIBOR plus 113 basis points. The company had retired $187.0 million of convertible-note principal in May, using cash and its existing revolver.
- For the first nine months, treasury-stock purchases were $99.1 million and dividends paid were $10.6 million. The quarterly dividend was $0.22 per share, up from $0.20. Repurchase authorization remaining was $22.7 million.
Outlook, risks and unusual items
- Management’s 2014 segment outlook: VITAS revenue growth of 1.0%–2.0% before Medicare cap, admissions growth of about 2.0%, adjusted EBITDA margin of 14.5%–15.0% before Medicare cap, and estimated Medicare cap impact of $3.6 million. Roto-Rooter revenue growth was forecast at 4.0%–5.0% and adjusted EBITDA margin at 19.0%–19.5%. Management expected operating income and cash flows to meet foreseeable needs. These are management estimates, not guarantees.
- Medicare and Medicaid supplied more than 90% of VITAS revenue. VITAS recorded $2.5 million of Medicare cap liability in Q3 and $1.8 million net for the first nine months; the September 30 accrued liability was $6.6 million. The filing describes ongoing monitoring of program-level exposure.
- VITAS faces government investigations and False Claims Act litigation alleging improper hospice eligibility and billing, among other matters. The court denied most of defendants’ motion to dismiss in the consolidated federal action on September 30, 2014, while dismissing claims predating July 24, 2002. The company says timing, outcome and potential loss cannot currently be estimated clearly; it warns of possible costs, payments, management distraction and reputational effects.
- A securities class action was dismissed after settlement approval in July 2014. Two shareholder derivative suits remained pending and were being addressed together in Delaware; the company intends to defend them. Regulatory-related net costs were $1.6 million for the first nine months of 2014.
- All reported debt was floating-rate. Chemed identified interest-rate exposure; a 100-basis-point change on each $10 million borrowed would change annual interest expense by $0.1 million. It reported no material change to previously disclosed risk factors.
- Other notable items include prior-year VITAS and Roto-Rooter litigation settlement charges, which explain much of the increase in reported earnings, and a $1.8 million uncertain-tax-position benefit recorded in Q3 2013 that did not recur.
Important facts for investors to verify
- Whether VITAS admissions, daily census, patient mix and reimbursement trends support the stated revenue and margin outlook, and whether Medicare cap exposure stays near management’s estimate.
- Collection timing and receivables aging, given the $40.6 million receivables increase and lower operating cash flow.
- Developments, potential financial exposure and insurance coverage in the VITAS federal and state proceedings and the derivative litigation; the filing does not provide a clear loss estimate.
- Roto-Rooter job volumes and growth in water restoration, which supported revenue despite declines in some service job counts.
- Debt repayment, variable-rate interest costs, covenant headroom, capital spending and the pace of share repurchases and dividends.
- Comparability of non-GAAP adjusted earnings and EBITDA with GAAP results; these measures exclude specified items and should not be viewed as substitutes for GAAP measures.