Chemed Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Chemed operates through VITAS, a hospice-care provider, and Roto-Rooter, a plumbing and drain-cleaning business. Financial amounts below are in millions of dollars unless stated otherwise.
Financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $340.9 | $354.4 | $1,064.7 | $1,061.5 |
| Operating income | $29.2 | $36.0 | $94.0 | $110.5 |
| Net income | $17.4 | $20.8 | $54.3 | $62.6 |
| Diluted EPS | $0.94 | $1.07 | $2.89 | $3.23 |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $135.9 | $77.3 |
- Q3 revenue fell 3.8%, while nine-month revenue rose 0.3%. VITAS revenue declined 5.2% for the quarter and 0.6% year to date; Roto-Rooter revenue grew 0.6% and 3.1%, respectively.
- GAAP net income declined 16.4% in Q3 and 13.2% year to date. Adjusted EBITDA, a non-GAAP measure, was $49.7 million in Q3 and $154.0 million year to date, compared with $49.0 million and $143.5 million. Adjusted EBITDA margin was 14.6% and 14.5%, respectively.
- Gross margin improved: consolidated margin was 28.7% in Q3 versus 27.6%, and 28.4% year to date versus 27.3%. Roto-Rooter’s stronger margins contributed to the improvement.
- Cash and cash equivalents were $83.2 million at September 30, up from $69.5 million at year-end 2012. Nine-month investing cash outflow was $21.0 million and financing outflow was $101.2 million, including $89.6 million of treasury-stock purchases and $10.5 million of dividends.
- Total debt carrying value was $181.3 million, all classified as current because the convertible notes mature in May 2014. The notes had $187.0 million principal and an approximately 6.875% effective interest rate. Chemed reported no variable-rate debt outstanding and approximately $317.1 million of available revolving credit, excluding the facility’s $150 million expansion feature. The company was in compliance with its covenants.
Material changes and drivers
- VITAS was affected by approximately 1.1% lower Medicare reimbursement rates after sequestration, shifts away from higher-acuity care, and a $3.2 million Medicare cap charge in Q3. VITAS receives more than 90% of its revenue from Medicare and Medicaid.
- Roto-Rooter’s revenue growth reflected pricing and mix, contractor operations, and prior-year acquisitions, partly offset by fewer jobs. Its gross margin improved to 47.3% in Q3 from 44.3%, and to 46.9% year to date from 44.1%.
- Reported operating results included substantial litigation-related charges: $10.5 million for a VITAS settlement in Q3 and $26.2 million in total other operating expenses for the first nine months, including Roto-Rooter-related charges. The increase in operating cash flow was attributed primarily to lower receivables and higher other current liabilities.
- Chemed repurchased 1.31 million shares during the first nine months for approximately $89.6 million. The filing reports $25.1 million remaining under the repurchase authorization.
Outlook, risks and unusual items
- Management expected VITAS full-year 2013 revenue, before Medicare cap adjustments, to be about 1% below 2012; admissions were estimated to decline about 3%, and adjusted EBITDA margin before Medicare cap was projected at 14.5%–15.0%. Management estimated a $1.8 million Medicare cap charge in Q4.
- Roto-Rooter expected full-year 2013 revenue growth of 2.5%, supported by approximately 3.2% higher pricing and job count roughly level with the prior year. Management said operating income and cash flows should be sufficient to meet business needs and commitments for the foreseeable future.
- VITAS faces significant regulatory and litigation exposure. The U.S. government’s False Claims Act case and consolidated related claims allege improper Medicare billing and hospice eligibility practices; the government seeks treble damages and penalties. Chemed said outcomes and potential losses could not be estimated clearly, intended to defend the matters, and cautioned that they could materially adversely affect the company.
- Other settlements include a $14.3 million agreement plus payroll taxes in a Roto-Rooter labor case, subject to court approval; a $10.3 million agreement plus payroll taxes in a VITAS employment case; and a $6.0 million insurer-funded securities-litigation settlement in principle, also subject to court approval. The company warned that investigations and litigation may cause defense costs, payments, management distraction, and adverse publicity.
- VITAS had $4.4 million of Medicare cap liability at September 30. Approximately $224,000 of VITAS revenue remained unbilled pending payer reviews; management said it could not predict whether future audits would result in material denials or revenue reductions.
- A $1.8 million tax benefit from expiration of statutes for uncertain tax positions supported Q3 results. The filing also identifies noncash convertible-debt discount amortization and market-value fluctuations in deferred-compensation assets as items affecting reported results.
Important facts for investors to verify
- Progress and financial exposure in the consolidated False Claims Act and related VITAS matters, including any developments in government intervention, court rulings, or settlement discussions.
- Actual VITAS admissions, care mix, reimbursement changes, and Medicare cap liability versus management’s full-year estimates.
- Repayment, refinancing, or conversion plans for the $187.0 million convertible notes due May 2014, and continued access to the revolving facility.
- How much of the year-to-date operating cash flow increase reflects sustainable operations versus timing-related changes in receivables and current liabilities.
- The filing presents adjusted diluted EPS inconsistently: the executive summary gives $1.36 for Q3 and $4.17 year to date, while the reconciliation table gives $1.36 and $4.17 but labels adjacent adjusted EPS figures of $1.38 and $4.26. Verify the intended non-GAAP EPS presentation against the filed tables.