Chemed Corporation — Q1 2011 Form 10-Q
Business and period: The quarter ended March 31, 2011. Chemed operates VITAS, a hospice-care provider, and Roto-Rooter, a plumbing and drain-cleaning business. Figures below compare the three months ended March 31, 2011 and 2010 unless noted. Dollar amounts are in millions except per-share data.
Financial performance and position
| Metric | Q1 2011 | Q1 2010 / comparison |
|---|---|---|
| Revenue | $330.9 | $308.8; up 7.2% |
| Operating income | $30.5 | $34.4; down 11.3% |
| Net income | $18.1 | $19.4; down 6.5% |
| Diluted EPS | $0.84 | $0.84 |
| Adjusted EBITDA (non-GAAP) | $45.6 | $43.1; margin 13.8% vs. 13.9% |
| Gross margin | 28.2% | 29.0% |
| Operating cash flow | $48.5 | $7.7 |
| Capital expenditures | $6.2 | $5.4 |
| Cash and cash equivalents at quarter-end | $59.7 | $49.9 at Dec. 31, 2010 |
| Long-term debt carrying value | $161.1 | $159.2 at Dec. 31, 2010 |
| Quarterly dividend per share | $0.14 | $0.12 |
VITAS revenue was $235.7 million, up 5.7%; Roto-Rooter revenue was $95.2 million, up 10.9%. VITAS after-tax earnings declined to $18.1 million from $18.4 million; Roto-Rooter earnings increased to $8.5 million from $7.8 million. Corporate expenses rose, including long-term incentive compensation.
Operating cash flow increased mainly because of a $17.9 million cash-flow benefit from lower accounts receivable, primarily reflecting the timing of Medicare receipts. Cash flow from financing included $24.3 million of treasury-stock purchases, dividends of $3.0 million, and $2.7 million of credit-facility issuance costs.
Changes, outlook and management commentary
- Revenue growth reflected VITAS average daily census growth of 4.8%, admissions growth of 6.4% and Medicare rate increases of about 2.1%. Roto-Rooter reported a 5.8% increase in job count and a 5.4% increase from price and mix.
- Margins narrowed: VITAS gross margin fell to 21.8% from 22.8%, attributed to a smaller Medicare-cap reversal, higher labor costs and start-up costs at new inpatient units. Roto-Rooter gross margin fell to 44.2% from 45.2%, reflecting mix toward excavation work and an unfavorable casualty-insurance adjustment.
- Management forecast 2011 VITAS revenue growth of 7%–9% before Medicare cap, admissions growth of 5%–7%, and adjusted EBITDA margin of 15.3%–16.3% before Medicare cap. Roto-Rooter guidance was revenue growth of 5%–8% and adjusted EBITDA margin of 16.5%–17.5%.
- Management said operating income and cash flows should be sufficient for foreseeable needs. Adjusted EBITDA is a non-GAAP measure and should not be viewed as a substitute for GAAP results.
Debt, liquidity and contingencies
- On March 1, 2011, Chemed entered a five-year, $350 million revolving credit facility, with a $150 million expansion feature. The stated rate was LIBOR plus 175 basis points. The company reported approximately $322 million available to draw, excluding the expansion feature, after $28 million of standby letters of credit.
- Chemed reported compliance with debt covenants and anticipated continued compliance during 2011. No variable-rate debt was outstanding at March 31, 2011. The convertible notes had $187.0 million principal and a $161.1 million carrying value; their disclosed fair value was approximately $191.3 million.
- VITAS faces federal and Texas investigations concerning hospice services and billing, including a qui tam complaint received in April 2011 that remained under seal; the government had not decided whether to intervene. A separate older federal investigation also remained ongoing. The company said it could not predict outcomes or estimate potential liability and stated its belief that it complies with applicable Medicare and Medicaid rules.
- Two employment-related class actions are disclosed: a conditionally certified nationwide Roto-Rooter service-technician case and a California VITAS case whose class-certification denial was on appeal. Chemed contests the allegations and could not estimate potential liability.
- VITAS’s Medicare-cap liability was $0.4 million at quarter-end, down from $1.4 million at year-end, following reversals tied to improved admission trends and an expired measurement period. More than 90% of VITAS revenue came from Medicare and Medicaid.
Investor verification priorities
- Check whether the unusually strong operating cash flow persists; the quarter’s year-over-year increase was driven substantially by receivables timing.
- Track VITAS census, admissions, labor costs, Medicare-cap exposure and progress of the federal/Texas investigations.
- Monitor gross-margin trends and the effect of Roto-Rooter’s excavation mix, pricing and insurance adjustments.
- Review execution against segment guidance and the basis for the stated adjusted EBITDA margins, including the non-GAAP reconciliation.
- Assess share-repurchase pace, convertible-note obligations and available revolving-credit capacity alongside the unresolved litigation and regulatory exposures.