Chemed Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; unaudited consolidated results. Chemed operates VITAS, a hospice-care provider, and Roto-Rooter, a plumbing, drain-cleaning and water-restoration services business.
Financial performance
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $515.8 million | $462.0 million |
| Income from operations | $79.4 million | $49.5 million |
| Net income | $55.9 million | $44.7 million |
| Diluted EPS | $3.38 | $2.70 |
| Operating cash flow | $89.3 million | $73.6 million |
| Capital expenditures | $19.9 million | $13.9 million |
- Revenue increased 11.6%. VITAS revenue rose 10.1% to $337.9 million; Roto-Rooter revenue rose 14.6% to $177.9 million, including contributions from 2019 acquisitions.
- Consolidated gross margin improved to 31.8% from 30.3%. VITAS margin was 23.2% versus 21.9%; Roto-Rooter was 48.1% versus 47.0%.
- Adjusted EBITDA, a non-GAAP measure, was $93.0 million versus $74.8 million; adjusted diluted EPS was $3.68 versus $2.92. These measures exclude specified items and should be considered alongside GAAP results.
- Net income included a $9.6 million loss from the market-value adjustment on deferred-compensation trust assets, compared with $2.3 million of income in Q1 2019. The prior-year quarter included a $6.0 million litigation-settlement expense.
- Cash and equivalents were $29.0 million at quarter-end, up from $6.2 million at December 31, 2019. Long-term debt increased to $160.0 million from $90.0 million, primarily reflecting borrowings related to share repurchases. The company had $252.1 million available under its revolving facility, after letters of credit, and was in compliance with debt covenants.
- Chemed repurchased $100.2 million of stock in the quarter and paid $0.32 per share in dividends. Net cash used in financing was $45.0 million.
Changes and operating drivers
- VITAS days of care increased 5.9%; management attributed its revenue growth mainly to higher care volume and Medicare rate increases, partly offset by acuity mix. VITAS after-tax earnings increased to $41.3 million from $29.3 million.
- Roto-Rooter growth reflected gains in its major service lines and acquired operations. Its after-tax earnings rose to $24.3 million from $23.0 million, while amortization from acquired franchise rights increased.
- Q1 operating cash flow increased $15.7 million year over year. Cash balances and receivables were affected by the timing of federal payments and receipts. Share repurchases and related borrowing were significant financing uses.
- The effective tax rate rose to 18.9% from 12.1%, partly because excess stock-compensation tax benefits were lower than in the prior-year quarter.
Outlook, risks and contingencies
- Management said COVID-19 had not materially affected Q1 results through March 31, but warned that the pandemic and economic disruption could materially affect operations, results, cash flow and financial position. Identified Q1 COVID-related costs were $1.8 million; management expected costs in Q2 and the remainder of 2020 to be significantly higher. VITAS also offered additional paid time off to frontline employees, estimated to cost about $23.2 million before related benefit and payroll taxes.
- Chemed did not provide updated 2020 earnings guidance, saying the full-year impact was too uncertain and that it expected to update guidance with Q2 results. Management expected VITAS’s $80.2 million CARES Act provider-fund payment, received April 10, 2020, to substantially offset anticipated pandemic-related costs and lost revenue, but its ability to retain and use the full amount depends on program rules and qualifying expenses or lost revenue. This payment occurred after quarter-end.
- The suspension of the 2% Medicare sequestration cut from May 1 through December 31, 2020 was expected to increase VITAS revenue by approximately $15 million to $20 million, excluding Medicare Cap effects.
- Risks include workforce availability and safety, personal-protective-equipment and other supply disruptions, fewer VITAS referrals, and weaker Roto-Rooter demand in a prolonged downturn. The company said it could not reliably predict the pandemic’s overall impact.
- VITAS operates in a heavily regulated industry and remains subject to a five-year corporate integrity agreement. A California wage-and-hour class settlement had preliminary court approval, with final approval then scheduled for May 21, 2020. Chemed said it could not reasonably estimate loss probabilities or ranges for certain other lawsuits, including the Roto-Rooter California technician class action.
- VITAS accounts receivable are substantially concentrated in government payors; Medicare, Medicaid and managed Medicaid represented about 75% of consolidated net receivables. VITAS also relies on one principal pharmacy-services provider.
Important facts for investors to verify
- Whether subsequent COVID-19 effects on service demand, labor, costs and cash flow materially differed from management’s Q1 assessment, and what revised guidance disclosed with Q2 results.
- The conditions for retaining and using the $80.2 million CARES Act payment, and the realized impact of the sequestration suspension.
- VITAS Medicare Cap exposure, including the disputed $8.3 million related to prior-year sequestration methodology and Q1’s $2.5 million Medicare Cap revenue reduction.
- Progress and potential financial exposure from the VITAS compliance agreement and outstanding wage-and-hour litigation.
- Debt, borrowing availability and covenant compliance as repurchases and operating conditions evolve.