Chemed Corporation — Q2 2023 Form 10-Q
Business context and reporting period
Chemed operates VITAS, a hospice-care provider, and Roto-Rooter, which provides plumbing, drain-cleaning and water-restoration services. This unaudited report covers the quarter and six months ended June 30, 2023, compared with the corresponding 2022 periods.
Financial performance and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $553.8 million | $531.3 million | $1,114.0 million | $1,061.8 million |
| Operating income | $69.5 million | $91.9 million | $142.3 million | $181.3 million |
| Net income | $53.4 million | $66.5 million | $107.5 million | $130.6 million |
| Diluted EPS | $3.51 | $4.40 | $7.09 | $8.62 |
| Adjusted EBITDA (non-GAAP) | $109.1 million | $110.9 million | $220.2 million | $221.1 million |
| Adjusted EBITDA margin (non-GAAP) | 19.7% | 20.9% | 19.8% | 20.8% |
Consolidated gross margin was 32.4% in Q2 versus 36.6% a year earlier, and 33.1% for the first half versus 36.6%. First-half operating cash flow was $192.8 million, up from $157.7 million; capital expenditures were $33.4 million. Cash and equivalents were $159.9 million at June 30, compared with $74.1 million at year-end.
Chemed repaid the remaining term-loan balance in April; no debt was outstanding at June 30. Its revolving facility provides $450 million of capacity, of which approximately $404.7 million was available after letters of credit. The company reported covenant compliance. The quarterly dividend was $0.38 per share, up from $0.36.
Material changes and management commentary
- Q2 revenue rose 4.2%; first-half revenue rose 4.9%. VITAS revenue increased 7.8% in Q2 and 5.8% for the half, supported by higher patient-care days and Medicare rate increases.
- Roto-Rooter revenue was essentially flat in Q2, down 0.2%, but up 3.8% for the half. Management cited lower drain-cleaning and plumbing job counts amid consumer caution; higher prices and service mix partly offset volume declines. Water restoration and excavation revenue grew.
- VITAS recorded $12.8 million of Q2 and $23.8 million of first-half expense for a temporary licensed-healthcare-worker hiring and retention bonus program. The first-half accrued amount was $43.4 million; $28.6 million was paid in July, with the remaining accrual expected to be paid over the following four quarters. The program weighed on VITAS margins and earnings.
- VITAS gross margin fell to 18.0% in Q2 from 23.6%; Roto-Rooter gross margin was 52.3% versus 53.2%. Chemed attributed VITAS’s decline mainly to retention bonuses and Roto-Rooter’s to lower revenue.
- Other expense/income comparisons were affected by deferred-compensation trust market-value movements: Q2 recorded $1.5 million of income versus $5.1 million of expense in Q2 2022. The prior-period comparison therefore also reflects an unusual market-value effect.
Outlook, risks and contingencies
Management’s 2023 outlook is for VITAS revenue growth of 8.5%–9.5% before Medicare cap, average daily census growth of 6.5%–7.5%, and adjusted EBITDA margin of 16.5%–17.0% before Medicare cap and accrued retention bonuses. Roto-Rooter revenue growth is forecast at 1.0%–2.0%, with adjusted EBITDA margin of 28.0%–28.5%. Full-year adjusted diluted EPS guidance is $19.90–$20.10, excluding specified stock-option, tax-benefit, litigation, retention-program and other discrete items. These are management estimates and non-GAAP measures, not guarantees.
Management estimated $11 million of Medicare cap billing limitations for calendar 2023. VITAS is exposed to Medicare and Medicaid reimbursement, audits and regulatory actions; Medicare, Medicaid and managed Medicaid represented about 71% of consolidated net receivables at June 30. VITAS is appealing a Medicare Administrative Contractor demand for $50.3 million arising from an OIG audit. It deposited the amount to preserve appeal rights, received a $2.5 million refund after initial review, and recorded the remaining $47.756 million deposit as a long-term asset. The OIG audit recommended approximately $140 million in repayment; VITAS disputes the audit’s methods and conclusions. The filing says outcomes and potential losses for many legal and regulatory matters cannot be reasonably estimated.
VITAS’s prior corporate integrity agreement concluded on June 22, 2023, after the OIG confirmed completion of its requirements. A separate Florida-related relator case was dismissed without prejudice in April 2023. The filing also identifies reliance on a primary pharmacy-services provider and a major medical-supplies vendor as potential operational risks. Management stated that liquidity was satisfactory for foreseeable needs and that it did not expect a significant financial impact from the March 2023 banking crisis. No material risk-factor changes from the prior 10-K were reported.
Investor facts to verify
- Track the Medicare audit appeal, recoupment exposure, and recoverability of the recorded deposit; distinguish the OIG’s recommendation from the MAC’s demand.
- Assess whether VITAS can meet staffing needs and control retention-related costs as the temporary bonus program winds down.
- Monitor hospice days of care, Medicare reimbursement and cap adjustments, and the effect of sequestration on VITAS results.
- Test Roto-Rooter’s full-year growth outlook against continuing declines in plumbing and drain-cleaning job counts.
- Review the assumptions and exclusions underlying adjusted EPS and segment margin guidance, and reconcile those non-GAAP measures to reported GAAP results.