Chemed Corporation — Q1 2019 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2019, compared with Q1 2018. Chemed operates VITAS, a hospice-care provider, and Roto-Rooter, a plumbing, drain-cleaning and water-restoration business. Amounts below are in U.S. dollars; financial statement figures are in millions unless noted.
Financial performance and liquidity
- Revenue: $462.0 million, up 5.2% year over year. VITAS revenue was $306.8 million (+5.1%); Roto-Rooter revenue was $155.3 million (+5.5%).
- Profit: Operating income was $49.5 million, down from $56.4 million. Net income was $44.7 million versus $45.0 million. Diluted EPS increased to $2.70 from $2.66; basic EPS was $2.80 versus $2.79.
- Margins: Consolidated gross margin was 30.3%, compared with 30.7%. Adjusted EBITDA, a non-GAAP measure, was $74.8 million versus $72.8 million; its revenue margin declined to 16.2% from 16.6%.
- Cash flow: Operating cash flow was $73.6 million, up from $65.2 million. Capital expenditures were $13.9 million versus $12.6 million. Cash and cash equivalents ended the quarter at $8.8 million, up from $4.8 million at year-end.
- Debt and liquidity: Long-term debt was $100.0 million, up from $89.2 million. The company had a $450 million revolving facility, $313.7 million of available capacity after letters of credit, and was in compliance with debt covenants. The filing says liquidity is sufficient for foreseeable needs.
- Balance sheet: Total assets were $1.070 billion and total liabilities were $481.8 million. Adoption of lease accounting added $87.8 million of right-of-use assets and $98.7 million of lease liabilities; these are operating leases, not reported debt.
- Shareholder returns: Chemed repurchased 150,000 shares for $49.3 million and paid $0.30 per share in dividends. The board authorized an additional $150 million of repurchases in February; $147.4 million remained authorized at quarter-end.
Material changes versus Q1 2018
- Revenue growth was supported by higher VITAS days of care (+6.6%) and Roto-Rooter pricing and activity. VITAS admissions fell to 17,758 from 18,279, while average daily census rose to 18,345 from 17,209.
- Operating income declined despite higher sales, including a $6.0 million VITAS litigation-settlement charge. VITAS after-tax earnings fell to $29.3 million from $32.0 million; Roto-Rooter earnings were nearly flat at $23.0 million.
- The effective tax rate fell to 12.1% from 19.9%, mainly reflecting $6.7 million of excess stock-compensation tax benefits, compared with $3.8 million a year earlier. This helped support reported EPS.
- VITAS recorded a $3.4 million Medicare cap revenue reduction; Q1 2018 included a $1.8 million reversal of a prior cap reduction. The consolidated gross margin and adjusted EBITDA margin both edged lower.
Outlook, risks and unusual items
- 2019 outlook: VITAS expects revenue growth of 5.5%–6.0% before Medicare cap adjustments, admissions growth of about 3.0%–4.0%, average daily census growth of 4.0%–5.0%, and adjusted EBITDA margin of 15.9% before the cap. Chemed estimates $10.0 million of Medicare cap limitations for 2019.
- Roto-Rooter expects full-year revenue growth of 9.0%–10.0% and adjusted EBITDA margin of 23.7%. Management cited expected pricing increases of about 2.0%, continued core plumbing and drain-cleaning growth, and continued but slowing water-restoration growth.
- VITAS is exposed to Medicare and Medicaid rules, audits and annual Medicare payment caps. It recorded the Q1 cap reduction and is appealing a separate CMS methodology that led to $4.1 million of asserted cap amounts withheld or to be withheld for prior measurement periods.
- VITAS remains subject to a five-year corporate integrity agreement following its 2017 False Claims Act settlement. Breach could lead to penalties or exclusion from federal healthcare programs. A proposed $5.75 million California employment-class settlement, plus employment taxes, was awaiting court approval. A separate Roto-Rooter California employee class action remained pending; the company could not estimate its loss range.
- The company recorded a $6.0 million litigation-settlement charge in Q1. It also adopted ASC 842 lease accounting and early adopted a cloud-computing implementation-cost standard; management said lease adoption did not materially affect net income or cash flow. About $2.6 million of cloud-system implementation costs was capitalized and not yet amortized.
- More than 85% of VITAS pharmacy-service purchases came from one provider in each period presented. Chemed also has variable-rate debt: at quarter-end, $100 million was outstanding, and a 100-basis-point rate change would affect annual interest expense by about $1 million on that balance.
Important facts for investors to verify
- Whether VITAS’s Medicare-cap estimates, CMS appeal and expected $10.0 million full-year cap impact develop as projected.
- Final court approval and total cost of the proposed California VITAS employment settlement, and developments in the Roto-Rooter class action.
- Underlying operating trends behind guidance, especially VITAS admissions and census, and Roto-Rooter job counts, pricing and water-restoration growth.
- How much reported earnings and EPS growth relied on stock-compensation tax benefits and management’s non-GAAP adjustments.
- Repurchase pace, revolving-credit usage, interest-rate exposure and the effect of lease liabilities on future commitments.