Chemed Corporation (CHE) — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023; unaudited. Chemed operates VITAS Healthcare, a hospice provider, and Roto-Rooter, a plumbing and related services business.
Financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $564.5 million | $526.5 million | $1,678.5 million | $1,588.3 million |
| Operating income | $86.9 million | $80.9 million | $229.2 million | $262.2 million |
| Net income | $75.0 million | $56.9 million | $182.5 million | $187.5 million |
| Diluted EPS | $4.93 | $3.78 | $12.02 | $12.41 |
| Adjusted EBITDA (non-GAAP) | $115.8 million | $99.2 million | $312.3 million | $320.3 million |
| Adjusted EBITDA margin (non-GAAP) | 20.5% | 18.8% | 18.6% | 20.2% |
Q3 consolidated gross margin was 35.8%, versus 34.1% a year earlier. Nine-month gross margin was 34.0%, versus 35.8%. The filing reports operating expenses and income taxes but does not provide a separate consolidated net profit margin figure.
For the first nine months, operating cash flow was $221.7 million, capital expenditures were $45.1 million, and cash and cash equivalents increased to $173.2 million from $74.1 million at year-end 2022. Cash flow from operations increased $12.0 million year over year. Chemed repaid $97.5 million of debt during the period, including the remaining term-loan balance in April; no variable-rate debt was outstanding at September 30. It had $404.8 million of available revolving credit, net of letters of credit, and was in compliance with debt covenants.
Changes and operating drivers
- Q3 revenue rose 7.2%: VITAS grew 12.5%, while Roto-Rooter grew 0.4%. VITAS growth reflected 9.4% more days of care and an approximately 2.7% weighted-average Medicare reimbursement increase.
- For the first nine months, revenue rose 5.7%: VITAS increased 8.0% and Roto-Rooter 2.7%. VITAS days of care increased 6.2%; reimbursement rates rose approximately 2.8%, partly offset by the return of Medicare sequestration.
- Roto-Rooter’s drain-cleaning revenue fell 5.7% in Q3 and 4.1% year to date, with management attributing lower job counts mainly to consumer caution. Pricing and mix supported plumbing revenue despite fewer jobs.
- Q3 net income increased year over year, while nine-month net income and adjusted EPS declined. The nine-month comparison reflects, among other factors, retention-program expense at VITAS, corporate costs, and changes in deferred-compensation investment valuations. Q3 also included a $4.2 million tax benefit from a state and local tax-structure realignment.
- VITAS’s licensed-healthcare-worker retention program accrued $43.4 million since inception; $28.6 million was paid in July 2023. The filing says the remaining accrued amount will be paid over the following four quarters.
Outlook, risks and unusual items
- Management forecast full-year 2023 VITAS revenue growth of 9.3%–9.5% before Medicare cap, average daily census growth of 7.3%–7.5%, and adjusted EBITDA margin of 15.4%–15.7% before Medicare cap. It estimated $8.0 million of Medicare cap billing limitations for 2023.
- Roto-Rooter’s 2023 revenue growth outlook was 1.6%–2.0%, with adjusted EBITDA margin of 28.4%–28.6%. Chemed’s full-year adjusted diluted EPS guidance was $19.82–$20.02, including $1.18 per share of after-tax retention-program costs. These are management estimates, not guarantees.
- VITAS is appealing a Medicare Administrative Contractor repayment demand of $50.3 million arising from an OIG audit. VITAS deposited that amount to preserve appeal rights and had received a $2.5 million refund by the filing date; the remaining deposit is reported as a long-term asset. The OIG audit recommended approximately $140 million in repayment, which VITAS disputes. The outcome and potential loss are uncertain.
- VITAS operates in a heavily regulated industry and relies substantially on Medicare and Medicaid; approximately 79% of consolidated receivables were from those programs at September 30. The company also cited possible operational disruption from reliance on key pharmacy and medical-supply vendors.
- Chemed reported the conclusion of VITAS’s corporate integrity agreement in June 2023 and dismissal without prejudice of a separate relator case in April 2023. Management stated it could not estimate the timing or outcome of various other regulatory matters or litigation. No other material changes to previously reported risk factors were identified.
Investor facts to verify
- Progress and financial exposure from the VITAS Medicare audit appeal, including the recoverability and timing of the remaining deposit.
- Whether VITAS meets its 2023 growth, margin, and Medicare-cap estimates, and how retention-program costs affect results.
- Whether Roto-Rooter job volumes recover from the reported drain-cleaning weakness and consumer caution.
- The sustainability of reported earnings and adjusted results after the one-time tax benefit and movements in deferred-compensation investment values; adjusted measures are non-GAAP.
- Cash conversion, receivable collection timing, and future capital allocation following the term-loan repayment and ongoing repurchases and dividends.