Chemed Corporation — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. Chemed operates two segments: VITAS, which provides hospice and palliative care, and Roto-Rooter, which provides plumbing, drain-cleaning and water-restoration services. The company manages its operating businesses on a decentralized basis.
Financial performance and position
- Revenue, earnings, margins and cash flow: The filing incorporates the consolidated financial statements and MD&A from the 2017 Annual Report, but the supplied text does not provide clear consolidated or segment values for revenue, profit, margins, or cash flow. Year-over-year financial performance therefore cannot be quantified from this text.
- Debt: Long-term debt was approximately $101.2 million at December 31, 2017; the filing states that all outstanding debt bore variable interest rates. For each $10 million borrowed under the credit facility, a 100-basis-point rate change would change annual interest expense by $100,000. Debt covenants restrict, among other things, additional borrowing, acquisitions and capital expenditures.
- Liquidity: Cash, current assets, current liabilities, and credit-facility availability are not clearly stated in the supplied text.
- Settlement-related amounts: Chemed paid $75 million plus interest and certain relator attorneys’ fees and expenses in the fourth quarter. It had recorded a $90 million reserve in the second quarter; in the fourth quarter, it reversed approximately $5.5 million ($3.4 million after tax) because estimated relator attorneys’ fees were lower than expected. At year-end, $1.1 million remained accrued for the Illinois settlement amount and unpaid legal and administrative fees.
- Shareholder returns: The company repurchased 500,000 shares during 2017 under its February 2011 program. The board authorized an additional $100 million under that program in March 2017. Quarterly dividends were $0.26 per share in the first half and $0.28 per share in the second half.
Material changes and unusual items
- VITAS and Chemed entered into a settlement in October 2017 resolving federal hospice-related False Claims Act litigation concerning patient eligibility and billed levels of care for services provided from July 2002 through May 2013. Chemed stated that the settlement did not admit facts or liability. The court dismissed the federal action on February 2, 2018.
- VITAS and certain subsidiaries entered into a five-year Corporate Integrity Agreement with the Office of Inspector General. It requires monitoring, reporting, training and independent compliance reviews; a breach could result in penalties or exclusion from federal healthcare programs.
- VITAS agreed to pay Illinois $500,000 to resolve a related matter, subject to execution of a final agreement.
- VITAS’s routine operations remain subject to claims reviews and audits. The filing says the company records provisions for anticipated claim denials, but future denials or recoupments cannot be predicted.
Management commentary, risks and contingencies
- VITAS reimbursement concentration: More than 95% of VITAS revenue came from Medicare and Medicaid payments; approximately 92% came from Medicare. Changes to reimbursement rates, eligibility rules, payment caps or methods could adversely affect results. VITAS generally receives per-diem payments and bears the cost risk of eligible services.
- Operating risks: VITAS faces nursing shortages, wage pressure, dependence on referral sources, competition, regulatory oversight and potential limits on expansion. A significant portion of VITAS’s operations and its headquarters are in south Florida, creating hurricane exposure.
- Roto-Rooter risks: Revenue and operating results are affected by weather, and the business faces fragmented competition, skilled-labor constraints, licensing requirements and brand-reputation risk.
- Other contingencies: The company reported a $1.7 million accrual for environmental liabilities related to the former DuBois business and contingent additional exposure up to $14.9 million; management said payment of the additional amount was not probable and recorded no provision for it. The company also disclosed California wage-and-hour class-action lawsuits and a shareholder derivative action. It could not reasonably estimate the probability or range of loss for the employee lawsuits.
- Outlook: The supplied text does not provide numerical earnings or revenue guidance. Management’s disclosures identify reimbursement, regulatory, labor, weather, litigation, debt-service and interest-rate risks; actual results may differ from forward-looking statements.
Important facts for investors to verify
- Consult the incorporated annual-report financial statements and MD&A for 2017 and 2016 revenue, earnings, segment results, cash flows, margins, cash balances and liquidity.
- Verify the settlement’s final cash cost, including interest and fees, and reconcile the reserve, fourth-quarter reversal and remaining accrual.
- Review debt balances, credit availability, covenant headroom, variable-rate exposure and scheduled debt service.
- Monitor VITAS performance under the five-year Corporate Integrity Agreement, Medicare and Medicaid audits, reimbursement changes and any recoupments.
- Track the resolution and potential exposure of the Illinois matter, California employee lawsuits, shareholder litigation and environmental contingencies.