Chemed Corporation — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. The filing also provides unaudited fourth-quarter results; this is an annual report, not a standalone quarterly filing. Chemed operates VITAS, a hospice and palliative-care provider, and Roto-Rooter, a plumbing, drain-cleaning and water-restoration business.
Financial performance
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $1.939 billion | $1.783 billion |
| Operating income | $257.4 million | $243.6 million |
| Net income | $219.9 million | $205.5 million |
| Diluted EPS | $13.31 | $12.23 |
| Adjusted diluted EPS (non-GAAP) | $13.95 | $11.93 |
| Operating cash flow | $301.2 million | $287.1 million |
| Capital expenditures | $53.0 million | $52.9 million |
| Long-term debt at year-end | $90.0 million | $89.2 million |
Revenue rose 8.7%, operating income 5.6%, net income 7.0%, and reported diluted EPS 8.8%. Adjusted EBITDA, a non-GAAP measure, increased to $350.9 million from $305.5 million; its margin rose to 18.1% from 17.1%. Gross margin excluding depreciation was 31.8%, versus 31.1%. Adjusted results exclude specified items and should not be treated as GAAP results.
VITAS generated $1.281 billion of revenue, up 7.0%; Roto-Rooter generated $657.4 million, up 12.4%. Operating cash flow less capital expenditures was $248.2 million. Cash was $6.2 million. Working capital was negative $71.5 million and the current ratio was 0.73. The company had $322.1 million of available revolving credit after letters of credit. Debt covenants were met, with a 0.37-to-1.00 leverage ratio against a maximum of 3.50 and a 4.34-to-1.00 fixed-charge coverage ratio against a minimum of 1.50.
Chemed paid $19.8 million in dividends and repurchased $92.6 million of shares during 2019. The annual dividend was $1.24 per share. It spent $138.0 million on acquisitions.
Fourth-quarter results
Fourth-quarter revenue was $522.3 million, compared with $457.5 million in 2018, an increase of 14.2%. Net income was $65.6 million versus $54.3 million, and diluted EPS was $3.96 versus $3.26. Fourth-quarter results included acquisition costs, reacquired-franchise-rights amortization, Medicare cap adjustments, and a deferred-compensation investment gain; see the filing’s quarterly reconciliation for detail.
Material changes and notable items
- Roto-Rooter’s revenue growth reflected higher activity and pricing across major service lines, plus $25.3 million of revenue from 2019 acquisitions. Chemed acquired Oakland-area franchise assets for $18.0 million and substantially all assets of HSW RR for $120.0 million, plus a $1.4 million working-capital adjustment. The acquisitions added $66.7 million of goodwill and $59.2 million of reacquired franchise rights.
- VITAS days of care increased 6.2%. Revenue growth included a 2.0% weighted-average Medicare rate increase, but Medicare cap revenue reductions increased to $12.4 million from $4.1 million. A $16.3 million Medicare cap liability was recorded at year-end. VITAS is appealing CMS’s disputed sequestration-related cap methodology.
- VITAS reported improved gross margin excluding depreciation, at 23.3% versus 22.5%. Roto-Rooter’s comparable margin was 48.4%, versus 48.8%.
- Chemed adopted lease accounting standard ASC 842 in 2019, recognizing $111.7 million of lease right-of-use assets and $125.9 million of lease liabilities at year-end. The company reported no material effect on net income or cash flows.
- Net income included $8.3 million of gains on deferred-compensation trust assets, offset by corresponding expense in SG&A. Other notable costs included a $6.0 million accrued wage-and-hour settlement, $4.8 million of acquisition expense, and a $2.3 million loss on sale of transportation equipment.
Outlook, risks and contingencies
Management’s 2020 guidance was revenue growth of 8.5%–9.5% for VITAS before Medicare cap effects, with admissions and average daily census growth of approximately 3.5%–4.5%; VITAS adjusted EBITDA margin before Medicare cap of 18.7%–19.0%; and Roto-Rooter revenue growth of 13.0%–14.0%, with adjusted EBITDA margin of 23.0%–23.5%. Management estimated $18.0 million of Medicare cap billing limitations for 2020. Adjusted diluted EPS guidance was $16.20–$16.50, excluding specified items, and assumed a 25.2% effective tax rate. These are forward-looking, non-GAAP estimates, not guarantees.
- VITAS depends heavily on government reimbursement: more than 95% of its revenue comes from Medicare and Medicaid. Rate changes, cap calculations, audits, payment delays or claim denials could affect revenue and margins. Wage and staffing pressures, particularly nurse availability, are additional risks.
- VITAS remained subject to a five-year Corporate Integrity Agreement entered in 2017 following a False Claims Act settlement. The company denied wrongdoing; breach could result in penalties or exclusion from federal healthcare programs.
- A proposed $5.75 million VITAS California wage-and-hour settlement, plus employment taxes, had $6.0 million accrued. It received preliminary court approval in January 2020, with final approval scheduled for May 2020. A separate Roto-Rooter California technician class action remained unresolved; the company said it could not estimate the probability or range of loss.
- Chemed had a $1.7 million recorded accrual for legacy DuBois environmental costs and contingent exposure up to $14.9 million more, which management did not consider probable and had not accrued.
- Other risks include variable-rate debt exposure, weather sensitivity at Roto-Rooter, competition, cybersecurity and operational disruption, and VITAS’s concentration of operations in South Florida, including hurricane exposure.
Investor facts to verify
- Review the detailed 2019 annual report financial statements and segment disclosures incorporated by reference, including the drivers of VITAS’s Medicare cap liability and the disputed CMS methodology.
- Track 2020 performance against management’s guidance, especially VITAS census, Medicare cap costs and margins, and Roto-Rooter’s acquisition-adjusted growth and margins.
- Check final court approval and payment of the VITAS wage settlement, and developments in the Roto-Rooter class action and any other legal or regulatory matters.
- Assess acquisition returns, goodwill and franchise-rights amortization following the Oakland and HSW purchases, as well as cash use for acquisitions, repurchases and dividends.
- Monitor liquidity and refinancing capacity alongside the low cash balance, working-capital deficit, variable interest rates and debt covenants.