Chemed Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014; comparative period is Q1 2013. Chemed operates VITAS hospice care and Roto-Rooter plumbing and drain-cleaning services. Unless stated otherwise, financial amounts below are in millions.
Financial results and liquidity
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Revenue | $358.3 | $366.6 | Down 2.3% |
| Operating income | $36.7 | $38.9 | Down 5.7% |
| Net income | $20.6 | $22.3 | Down 7.6% |
| Diluted EPS | $1.12 | $1.17 | Down 4.3% |
| Adjusted net income (non-GAAP) | $23.7 | $26.1 | Down 9.3% |
| Adjusted diluted EPS (non-GAAP) | $1.32 | $1.38 | Down 4.3% |
| Adjusted EBITDA (non-GAAP) | $47.7 | $51.3 | Down 7.1% |
| Adjusted EBITDA margin | 13.3% | 14.0% | Down 0.7 percentage point |
| Operating cash flow | $(11.8) | $8.1 | Down $20.0 |
Gross margin was 28.0%, versus 27.9%. Cash and cash equivalents fell to $39.5 from $84.4 at year-end, primarily alongside working-capital outflows and capital returns. Capital expenditures were $8.1. The filing does not provide a separately stated free-cash-flow figure.
At March 31, current assets were $198.4 and current liabilities $337.9. Accounts receivable increased $24.4 from year-end, which management attributed mainly to timing of Medicare receipts; operating cash flow also reflected decreases in accounts payable and other current liabilities and an increase in receivables.
Convertible notes had a $187.0 principal amount and $185.8 carrying value, classified as current and due in May 2014. Chemed had no variable-rate debt outstanding, was compliant with debt covenants, and had approximately $315.0 of available revolving credit capacity, excluding a $150.0 expansion feature. The facility’s leverage covenant is below 3.50:1 and fixed-charge coverage covenant above 1.50:1. Cash dividends were $0.20 per share, versus $0.18; the company repurchased 382,934 shares for $33.0 at an average $86.13 per share.
Material changes and segment performance
- VITAS: Revenue was $260.4, down 4.0%; after-tax earnings were $18.2, down 9.8%. Lower continuous-care and inpatient revenue, a 0.8% decline in average daily census, reimbursement effects and mix shift weighed on results. Medicare and Medicaid accounted for over 90% of VITAS revenue. Direct care gross margin decreased to 21.1% from 21.4%.
- Roto-Rooter: Revenue was $97.9, up 2.7%; after-tax earnings were $10.0, up 4.2%. Plumbing revenue improved, while drain-cleaning revenue declined; consolidated segment gross margin was 46.4%, versus 46.3%.
- Consolidated net income also reflected higher VITAS health-insurance costs and higher Roto-Rooter advertising expense. Lower diluted share count partly offset the earnings decline in reported EPS.
Outlook, commentary, risks and unusual items
- For full-year 2014, VITAS expected revenue growth before Medicare cap of 1%–3%, admissions growth of 3%–4%, adjusted EBITDA margin before cap of 14.5%–15.0%, and Medicare cap expense of approximately $5.0. Roto-Rooter expected revenue growth of 3%–4% and adjusted EBITDA margin of 19%–20%. Management expected operating income and cash flows to be sufficient for foreseeable needs. These are forward-looking estimates, not guarantees.
- VITAS reversed $0.847 of previously recorded Medicare cap liability in Q1 as admissions trends improved; the remaining recorded liability was $7.413 at March 31. Medicare rate changes and sequestration affected reimbursement; management described the net reimbursement impact as a 0.6% reduction year over year in Q1.
- VITAS faces significant False Claims Act and related government investigations and litigation concerning alleged hospice eligibility and billing practices. The company said outcome, timing and potential losses could not be estimated, intends to defend the matters, and warned they could adversely affect results, costs and management attention.
- A securities class-action settlement for $6.0, funded by the company’s insurer, received preliminary court approval; final approval was scheduled for July 19, 2014. The settlement was recorded as an accrual with an offsetting prepaid asset. The filing also describes derivative lawsuits and related proceedings.
- The notes became convertible beginning March 1, 2014. Their conversion feature increased diluted share count by 285,000 shares under the stated calculation; Chemed said purchased call options are expected to offset shares issued at maturity and anticipated no economic dilution. Verify the May 2014 maturity and its resolution.
- 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.
Important facts for investors to verify
- Subsequent filings and disclosures on repayment, conversion or refinancing of the $187.0 million notes due in May 2014, and the effect on liquidity and share count.
- Developments in federal and state VITAS investigations and False Claims Act litigation, including any quantified exposure, settlement or changes to Medicare billing limitations.
- Whether VITAS admissions, average daily census, care mix and Medicare cap costs track management’s 2014 estimates.
- Whether receivables and operating cash flow recover after the reported Medicare-receipt timing and working-capital outflows.
- Progress toward the stated segment revenue and adjusted EBITDA margin outlook; adjusted measures are non-GAAP and should be assessed alongside GAAP results.