Chemed Corporation — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Chemed operates through VITAS, a hospice-care provider, and Roto-Rooter, which provides plumbing, drain-cleaning and water-restoration services. Unless otherwise noted, amounts below are in millions.
Key financial results
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $473.6 | $441.8 | $935.6 | $881.0 |
| Operating income | $65.5 | $58.1 | $115.0 | $114.5 |
| Net income | $50.7 | $55.0 | $95.4 | $100.0 |
| Diluted EPS | $3.08 | $3.27 | $5.79 | $5.93 |
| Adjusted net income (non-GAAP) | $55.2 | $47.2 | $103.4 | $93.0 |
| Adjusted diluted EPS (non-GAAP) | $3.36 | $2.81 | $6.27 | $5.52 |
| Adjusted EBITDA (non-GAAP) | $85.1 | $73.7 | $159.9 | $146.4 |
Q2 consolidated gross margin was 31.7%, up from 30.8%; first-half gross margin was 31.0%, versus 30.7%. Adjusted EBITDA margin was 18.0% in Q2 versus 16.7%, and 17.1% for the first half versus 16.6%. These adjusted measures are non-GAAP.
- Segment performance: Q2 revenue grew 5.4% at VITAS and 10.9% at Roto-Rooter. VITAS after-tax earnings rose to $37.3 million from $31.8 million; Roto-Rooter’s rose to $27.2 million from $25.3 million. For the first half, segment revenue increased 5.2% and 8.2%, respectively.
- Cash flow: First-half operating cash flow was $108.9 million, down from $121.0 million; capital expenditures were $28.3 million, versus $23.9 million. Cash and cash equivalents were $3.3 million at June 30, down from $4.8 million at year-end.
- Debt and liquidity: Long-term debt was $85.0 million, down from $89.2 million at December 31, 2018. Chemed reported approximately $327 million of available, eligible revolving capacity, after $38 million of standby letters of credit. It was in compliance with debt covenants.
- Balance sheet: Current assets were $180.2 million and current liabilities $223.7 million. The company reported $101.6 million of operating lease liabilities following adoption of ASC 842; adoption did not materially affect net income or cash flows.
- Dividends and repurchases: First-half dividends were $0.60 per share, up from $0.56. Chemed repurchased $71.9 million of shares in the first half and had $124.7 million of authorization remaining at June 30.
Material changes and unusual items
Revenue growth was driven by both businesses. VITAS total days of care increased 5.9% in Q2 and 6.2% in the first half. Roto-Rooter reported growth across its major service lines; management attributed it to a combination of pricing, service mix and job-count increases.
- GAAP net income and EPS declined year over year despite higher operating income. The effective tax rate rose to 21.1% in Q2 from 4.7%, and to 17.1% for the first half from 12.2%; prior-year results benefited from larger excess tax benefits on stock compensation.
- VITAS recorded $6.0 million for a potential litigation settlement in the first half. Chemed also recorded a $2.3 million impairment on transportation equipment held for sale. Management’s non-GAAP adjustments exclude specified items; review the filing’s reconciliations when assessing adjusted results.
- VITAS recorded $5.8 million of Medicare cap revenue reductions in the first half, compared with a $1.3 million reversal of prior-year cap expense in the comparable 2018 period. Q2’s reduction was $3.2 million, versus $0.5 million in Q2 2018. The company also disputes CMS’s “as if” sequestration methodology; it reported $5.8 million of historical cap amounts owed and withheld through payment deductions, and said it had appealed.
- Chemed adopted the new lease standard on January 1, 2019, bringing most leases onto the balance sheet. It also early adopted guidance on cloud-computing implementation costs and had capitalized approximately $2.8 million for systems not yet in service at June 30.
Outlook, risks and contingencies
The filing provides no numerical earnings or revenue guidance. Management said liquidity and capital resources were satisfactory for foreseeable needs and anticipated continued covenant compliance. Capital allocation alternatives include repurchases, debt repayment, acquisitions and dividends. On July 1, 2019, Chemed acquired a Roto-Rooter franchise and related assets in Oakland for $18.0 million; purchase-price accounting was not finalized.
- VITAS operates in a heavily regulated sector, with more than 90% of its service revenue from Medicare and Medicaid. Medicare cap limits, audits, reimbursement policy and regulatory compliance create revenue and operating risks.
- VITAS remains subject to a five-year corporate integrity agreement following a 2017 False Claims Act settlement. Breach could result in stipulated penalties or exclusion from federal healthcare programs.
- A California employee class settlement covering specified VITAS cases was agreed at $5.75 million plus employment taxes, subject to court approval. Chemed said it could not estimate the probability or range of loss for other identified lawsuits, including a Roto-Rooter California class action.
- VITAS relies on one provider for more than 90% of its pharmacy services. Variable-rate debt exposes the company to interest-rate risk; the filing estimates that a 100-basis-point change affects annual interest expense by $100,000 for each $10 million borrowed.
Investor verification priorities
- Track VITAS admissions, days of care, patient mix and Medicare cap exposure, including the CMS appeal and payment withholdings.
- Confirm court approval, final terms and payment timing for the $5.75 million class settlement, and monitor other litigation and regulatory matters.
- Reconcile GAAP results with management’s non-GAAP adjustments, especially stock-compensation tax benefits, litigation, impairment and Medicare cap items.
- Monitor operating cash flow, receivables collection timing, capital spending, lease obligations, revolving-credit availability and share repurchases.
- Assess the Oakland acquisition’s final purchase-price allocation and subsequent contribution to Roto-Rooter results.