Business context and reporting period
Chemed Corporation’s unaudited Form 10-Q covers the quarter and six months ended June 30, 2022. Its two operating businesses are VITAS Healthcare, a hospice provider, and Roto-Rooter, which provides plumbing, drain cleaning and water restoration services.
Financial performance and liquidity
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $531.3 million | $532.3 million | $1,061.8 million | $1,059.6 million |
| Operating income | $91.9 million | $71.7 million | $181.3 million | $152.1 million |
| Net income | $66.5 million | $56.5 million | $130.6 million | $121.9 million |
| Diluted EPS | $4.40 | $3.51 | $8.62 | $7.52 |
| Adjusted EBITDA (non-GAAP) | $110.9 million | $110.9 million | $221.1 million | $219.5 million |
Q2 gross margin was 36.6%, versus 34.1%; six-month gross margin was 36.6%, versus 34.8%. Adjusted EBITDA margin was 20.9% in Q2 and 20.8% for the first half, up slightly from the comparable 2021 periods. Adjusted diluted EPS was $4.84 for Q2 and $9.63 for the first half, compared with $4.60 and $9.04, respectively; these are non-GAAP measures.
Six-month operating cash flow was $157.7 million, versus $132.0 million; capital expenditures were $25.6 million. Cash and equivalents were $9.6 million at June 30, down from $32.9 million at year-end. Debt was $116.8 million, including $5.0 million current, compared with $185.0 million at December 31, 2021. Chemed reported $387.0 million of available revolver capacity after letters of credit, and compliance with debt covenants. The new five-year facilities comprise a $450 million revolver and a $100 million term loan; borrowing rate was SOFR plus 100 basis points at quarter-end.
Changes versus prior comparable periods
- Q2 revenue declined 0.2% as Roto-Rooter revenue rose 6.0% and VITAS revenue fell 4.5%. For the first half, revenue increased 0.2%, with Roto-Rooter up 7.6% and VITAS down 4.9%.
- VITAS revenue declines reflected fewer days of care (down 3.8% in Q2 and 3.9% in the first half) and adverse acuity mix, partly offset by Medicare reimbursement-rate increases. Roto-Rooter growth reflected higher revenue across major service lines, including pricing and mix effects.
- Net income and diluted EPS increased, while adjusted EBITDA was nearly flat in Q2 and modestly higher for the first half. Operating margin improved, with management citing better VITAS labor and ancillary costs and improved Roto-Rooter labor costs.
- Other expense swung to $4.9 million in Q2 from $3.8 million of other income, primarily reflecting a $5.1 million loss on deferred-compensation trust assets versus a $3.7 million gain in 2021. The corresponding six-month trust adjustment was a $9.0 million loss versus a $6.7 million gain.
- Share repurchases were $77.2 million in the first half, down from $166.6 million a year earlier; dividends paid were $10.7 million. The company repurchased 157,500 shares and had $124.7 million of authorization remaining.
Outlook, commentary and risks
Management’s full-year 2022 guidance is diluted EPS of $19.30–$19.50, excluding noncash stock-option expense, stock-option tax benefits, litigation costs and other discrete items; 2021 adjusted diluted EPS was $19.33. Guidance assumes a 25.1% adjusted effective tax rate and 15.12 million diluted shares.
- VITAS: 2022 revenue before Medicare cap is forecast to decline 4.5%–5.0%; average daily census is expected to decline 3.5%; adjusted EBITDA margin before Medicare cap is forecast at 17.0%–17.2%. Management estimates $10 million of Medicare cap billing limitations for calendar 2022. It attributes approximately $15 million of expected revenue reduction to the phaseout of sequestration relief.
- Roto-Rooter: full-year revenue growth forecast at 5.5%–5.7%, with adjusted EBITDA margin of 29.2%–29.5%.
- Management cautions that COVID-19 effects, inflation, a potential recession, and possible government rules or mandates make forecasting unusually challenging and could affect guidance. It believes cash flows and available capital are sufficient for foreseeable needs.
Significant regulatory contingency: On July 14, 2022, VITAS received a final OIG audit report recommending repayment of approximately $140 million for elevated-level-of-care hospice services. VITAS disputes the report’s methodology and expects any CMS demand to be substantially reduced, but says a demand could still be material. The company cannot predict the outcome or reasonably estimate a potential loss. Separately, VITAS is appealing CMS’s “as if” sequestration methodology; it reports $8.8 million owed for Medicare cap periods from 2013–2022, with amounts withheld from payments. A DOJ investigation concerning claims for 32 Florida patients also remains unresolved.
VITAS operates under a corporate integrity agreement following a 2017 False Claims Act settlement. The filing also notes substantial dependence on government payors and reliance on a single provider for specified pharmacy services and a single vendor for most medical supplies. The company says disruption could cause operational challenges or higher costs.
Investor facts to verify
- Track VITAS patient days, admissions, length of stay, acuity mix and Medicare cap exposure against management’s full-year assumptions.
- Monitor developments in the OIG audit, any subsequent CMS demand and appeals, including the potential timing and amount of any repayment.
- Check whether the $8.8 million Medicare cap dispute, DOJ investigation or corporate integrity agreement produces new liabilities, payment withholdings or operational restrictions.
- Assess whether Roto-Rooter’s price and mix growth can continue amid declining job counts in some service lines, and whether both segments meet their margin guidance.
- Review cash generation, debt paydown, floating-rate interest exposure, and capital returns, including repurchases and dividends.
- Interpret adjusted earnings and EBITDA alongside GAAP results; adjusted measures exclude specified items and are not GAAP measures.