Chemed Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods. Chemed operates VITAS, a hospice-care provider, and Roto-Rooter, which provides plumbing, drain-cleaning and water-restoration services.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $538.7 million | $528.3 million | $1,598.3 million | $1,546.3 million |
| Net income | $72.0 million | $67.7 million | $193.9 million | $205.7 million |
| Diluted EPS | $4.55 | $4.14 | $12.06 | $12.53 |
| Adjusted diluted EPS, non-GAAP | $5.06 | $4.86 | $14.09 | $12.94 |
| Adjusted EBITDA, non-GAAP | $119.4 million | $117.8 million | $338.8 million | $319.6 million |
| Adjusted EBITDA margin, non-GAAP | 22.2% | 22.3% | 21.2% | 20.7% |
Q3 revenue grew 2.0%; net income rose about 6%. For the first nine months, revenue grew 3.4%, while net income fell about 5.7%; adjusted diluted EPS increased about 8.9%. Consolidated gross margin was 36.5% in Q3 (35.8% prior year) and 35.4% for the nine-month period (32.5% prior year).
Cash flow and liquidity: Nine-month operating cash flow was $245.0 million, down from $402.4 million. Capital expenditures were $44.5 million. Cash was $28.7 million at September 30, down from $162.7 million at year-end 2020, primarily reflecting $330.4 million of treasury-stock purchases, alongside dividends and other financing flows. Current assets were $200.6 million and current liabilities $286.1 million. Chemed had no debt outstanding, approximately $403.8 million of available revolver capacity after letters of credit, and was in compliance with its covenants.
Cash dividends were $0.36 per share in Q3 and $1.04 per share for the nine months. The company repurchased 700,000 shares for $330.4 million during the nine-month period; $148.0 million of authorization remained at quarter-end.
Material changes and operating drivers
- Roto-Rooter: Revenue increased 15.7% in Q3 and 20.1% year to date, compared with COVID-affected 2020 periods. Management cited growth across major service lines, increased job counts and pricing/service mix. Segment after-tax income rose to $44.6 million in Q3 from $31.2 million and to $124.5 million year to date from $85.0 million. Gross margin improved to 53.0% in Q3 and 52.7% year to date.
- VITAS: Revenue declined 5.8% in Q3 and 5.7% year to date. Days of care declined 5.3% and 6.2%, respectively; management cited reduced census, including lower nursing-home occupancy, and an adverse acuity mix. VITAS after-tax income fell to $43.0 million in Q3 from $45.7 million and to $113.4 million year to date from $147.3 million. Q3 gross margin decreased to 25.0% from 26.8%, partly due to discretionary bonuses; the nine-month margin improved to 23.4% from 22.9%.
- Q3 operating income increased to $92.9 million from $74.3 million. The comparison includes prior-year CARES Act grant and litigation-related items; nine-month 2020 results also included a $32.2 million CARES Act grant benefit in other operating income. The effective tax rate was 24.5% in Q3 and 23.7% year to date, higher than the respective 2020 rates of 17.0% and 17.8%, partly because stock-compensation tax benefits were lower.
Outlook, risks and unusual items
- Chemed raised full-year 2021 adjusted diluted EPS guidance to $19.00–$19.20 from initial guidance of $17.00–$17.50. The estimate excludes noncash stock-option expense, stock-option exercise tax benefits, litigation costs and other discrete items; the company assumed a 25.1% adjusted effective tax rate. 2020 adjusted diluted EPS was $18.08.
- Management forecast VITAS revenue before Medicare cap to decline about 5%, average daily census to decline about 5.5%, and adjusted EBITDA margin before Medicare cap of 18.8%. It estimated $6.6 million of Medicare-cap billing limitations for calendar 2021. Roto-Rooter was forecast to grow full-year revenue 17.3%, with adjusted EBITDA margin of 28.5%–29.0%.
- Management said the pandemic continues to materially affect operations, cash flow and financial position and makes forecasting difficult. Future effects of COVID-19, government actions, workforce conditions and economic disruption remain uncertain; the businesses were not then materially restricted by operating regulations.
- VITAS is subject to a DOJ False Claims Act investigation concerning 32 Florida patients and an OIG audit of elevated-level hospice care. Potential audit repayments could include extrapolated amounts; the company said outcomes and losses could not then be estimated. VITAS also disputes CMS’s “as if” sequestration methodology for $8.7 million withheld in connection with Medicare-cap periods from 2013–2020. The filing reports $3.6 million of net Medicare-cap revenue reduction for the first nine months of 2021.
- VITAS operates under a five-year corporate integrity agreement entered in 2017. Noncompliance could lead to stipulated penalties or exclusion from federal healthcare programs. The company also disclosed concentration in government payors and reliance on a principal VITAS pharmacy-services provider.
- The 2% Medicare sequestration cut was suspended through December 31, 2021; Chemed recognized approximately $17.9 million of revenue from the suspension in the first nine months of 2021. CARES Act funds had been fully recognized by year-end 2020, and the company completed required utilization reporting by the September 30, 2021 deadline.
Investor verification priorities
- Track VITAS census, days of care, nursing-home occupancy, acuity mix and Medicare-cap estimates against management’s full-year assumptions.
- Assess whether Roto-Rooter’s strong growth and margins persist beyond comparison periods affected by 2020 shutdowns.
- Review DOJ and OIG matter developments, potential extrapolated repayments, and the disputed Medicare-cap withholding.
- Reconcile reported earnings with non-GAAP adjusted earnings, including the effects of CARES Act items, stock-based compensation, tax benefits and other exclusions.
- Monitor operating cash generation, significant share repurchases, cash balances and available revolver capacity.