Chemed Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods. Chemed operates VITAS, a hospice-care business, and Roto-Rooter, a plumbing, drain-cleaning and water-restoration business. Amounts below are in millions of dollars unless noted.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Revenue | $381.9 | $360.2 | $758.6 | $718.5 |
| Operating income | $44.6 | $41.5 | $85.2 | $78.2 |
| Net income | $27.0 | $24.4 | $51.5 | $44.9 |
| Diluted EPS | $1.55 | $1.36 | $2.96 | $2.48 |
| Adjusted EBITDA, non-GAAP | $57.7 | $52.2 | $110.5 | $99.9 |
| Adjusted EBITDA margin, non-GAAP | 15.1% | 14.5% | 14.6% | 13.9% |
- Q2 revenue grew 6.0%; net income rose 10.7% and diluted EPS rose 14.0%. First-half revenue grew 5.6%; net income rose 14.6% and diluted EPS rose 19.4%. Chemed attributed EPS growth partly to fewer shares outstanding.
- Q2 segment revenue was $276.5 million for VITAS, up 4.7%, and $105.5 million for Roto-Rooter, up 9.7%. First-half revenue was $546.1 million for VITAS, up 4.1%, and $212.5 million for Roto-Rooter, up 9.5%.
- Consolidated gross margin increased to 29.1% in Q2 from 28.6%, and to 28.9% for the first half from 28.3%. Roto-Rooter gross margin improved to 48.0% in Q2 and 47.6% for the first half, with management citing favorable insurance experience. VITAS gross margin was 21.9% in Q2 and 21.6% for the first half, broadly flat year over year.
- First-half operating cash flow was $69.6 million, versus $45.1 million. Capital expenditures were $18.8 million; cash used in investing activities was $25.1 million, including $6.6 million for two Roto-Rooter acquisitions. Cash increased $18.6 million to $32.7 million.
- At June 30, cash was $32.7 million; total debt was $160.0 million, including $65.0 million drawn on the revolver and a $95.0 million term loan. Current debt was $7.5 million and long-term debt $152.5 million. Approximately $248.4 million of revolving capacity remained available after letters of credit. The company reported compliance with debt covenants.
- Current assets were $190.0 million and current liabilities $161.9 million. Accounts receivable was $119.1 million, down from $124.6 million at year-end. VITAS receivable days outstanding, excluding unapplied Medicare payments, rose to 40.8 from 36.6 a year earlier.
- Cash dividends were $0.22 per share in Q2 and $0.44 for the first half, compared with $0.20 and $0.40, respectively, in 2014. Chemed repurchased 250,000 shares in Q2 at an average $119.05 per share; $82.0 million of repurchase authorization remained.
Material changes and management commentary
- Roto-Rooter water-restoration revenue rose 169.3% in Q2 and 298.6% for the first half, reflecting expansion into additional locations. Plumbing revenue also increased; drain-cleaning revenue declined.
- VITAS Q2 days of care increased 5.1% and first-half days of care increased 4.3%. Management cited Medicare reimbursement-rate increases of approximately 1.4%, offset in part by geographic and level-of-care mix shifts.
- Interest expense declined to $1.9 million for the first half from $6.2 million, in part reflecting the prior-year convertible-note accounting and debt changes. Debt under the current facility bears floating interest at LIBOR plus 113 basis points. A 100-basis-point rate change would change annual interest expense by $100,000 for each $10 million borrowed.
Outlook, risks and unusual items
- 2015 guidance: VITAS expects revenue growth before Medicare cap of 4.0%–5.0%, admissions growth of 4.0%–5.0%, and adjusted EBITDA margin before Medicare cap of 14.0%–15.0%. Estimated Medicare cap billing limitations are $2.8 million.
- Roto-Rooter expects 2015 revenue growth of 5.0%–6.0% and adjusted EBITDA margin of 19.5%–20.0%. Management cited continued water-restoration expansion and approximately 1.0% higher job pricing. Chemed expects operating income and cash flows to meet foreseeable operating and commitment needs.
- VITAS operates in a heavily regulated industry, and more than 90% of its revenue comes from Medicare and Medicaid. Federal False Claims Act matters and related state inquiries involve allegations concerning hospice eligibility and billing. The government partially intervened in consolidated litigation; the company stated it could not estimate the timing, outcome, or any probable or estimable loss. Related investigation costs were $2.7 million for the first half of 2015, versus $1.2 million in 2014. Chemed warned that these matters could entail defense costs, payments, management distraction and adverse publicity.
- VITAS recorded no Medicare cap adjustment in Q2; for the first half it recorded a $165,000 reversal of a prior estimate. The Medicare cap liability was $1.2 million at June 30, after $4.8 million of payments during the half.
- Other notable costs included $2.4 million of first-half long-term incentive compensation and $2.8 million of stock-option expense. The company presents adjusted net income and adjusted EBITDA as non-GAAP measures; reported first-half adjusted net income was $56.5 million, versus GAAP net income of $51.5 million.
- Chemed reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to previously disclosed risk factors.
Investor verification priorities
- Track developments in the VITAS federal and state billing litigation, potential financial exposure, and ongoing investigation costs; the filing does not provide a clear loss estimate.
- Test VITAS growth and profitability against the guidance, particularly Medicare cap limits, patient mix, days of care, and receivable collection trends.
- Assess whether Roto-Rooter’s unusually rapid water-restoration growth and improved insurance-driven margins are sustainable.
- Review floating-rate debt exposure, covenant headroom, remaining revolver availability, and the pace and price of share repurchases.
- Reconcile non-GAAP adjusted earnings and EBITDA to GAAP results and evaluate the recurring nature of excluded costs.