Chemed Corporation — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparison is with Q1 2022. Chemed operates VITAS hospice care and Roto-Rooter plumbing, drain-cleaning, and water-restoration services. Amounts below are in U.S. dollars; financial statement figures are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $560.2 | $530.5 | +5.6% |
| Operating income | $72.8 | $89.4 | −18.5% |
| Net income | $54.1 | $64.2 | −15.7% |
| Diluted EPS | $3.58 | $4.22 | −15.2% |
| Adjusted net income (non-GAAP) | $72.9 | $72.8 | Approximately flat |
| Adjusted diluted EPS (non-GAAP) | $4.82 | $4.79 | +0.6% |
| Adjusted EBITDA (non-GAAP) | $111.0 | $110.2 | +0.7% |
| Adjusted EBITDA margin | 19.8% | 20.8% | −1.0 percentage point |
| Operating cash flow | $60.5 | $101.1 | −$40.6 |
| Capital expenditures | $17.0 | $12.6 | +$4.4 |
Revenue rose at both segments: VITAS was up 3.8% to $310.5 million and Roto-Rooter up 7.9% to $249.7 million. VITAS net income fell to $24.8 million from $36.5 million, while Roto-Rooter net income increased to $47.7 million from $43.9 million. Consolidated gross margin declined to 33.8% from 36.6%; VITAS gross margin was 18.3% versus 24.0%, and Roto-Rooter’s was 53.1% versus 52.8%.
Cash and equivalents were $58.1 million at March 31, down from $74.1 million at year-end. Total debt was $21.3 million, compared with $97.5 million at December 31, after $75.0 million of term-loan prepayments; the company said it planned to repay the remaining $21.3 million on April 28. Approximately $404.7 million of revolving credit capacity remained available, net of letters of credit. The company reported compliance with debt covenants. The quarterly dividend was $0.38 per share, versus $0.36 a year earlier.
Material changes and operating drivers
- VITAS revenue growth reflected 3.0% more days of care and an approximately 2.9% geographically weighted Medicare rate increase, partly offset by the reinstatement of the 2.0% Medicare sequestration reduction. The filing says Medicare cap and other contra-revenue changes reduced revenue growth by 10 basis points.
- VITAS recorded $10.9 million of pretax expense for a temporary licensed-healthcare-worker retention bonus program, contributing to lower VITAS margin and earnings. Management cited industry-wide shortages of licensed healthcare workers.
- Roto-Rooter growth was led by water restoration (+25.8%), excavation (+8.0%), and plumbing (+5.8%); drain-cleaning revenue was nearly flat. Plumbing revenue benefited from a 13.0% increase in price and service mix, offset by a 7.2% decrease in job count.
- Operating cash flow declined mainly because net income was lower and accounts receivable increased. Management attributed receivables movements in part to the timing of federal government payments to VITAS; it noted these timing effects generally normalize over a two-year period.
- Other operating expense included $1.8 million of litigation settlements. Adjusted results exclude this item and other specified costs; adjusted measures are non-GAAP and should not be viewed as substitutes for GAAP results.
Outlook, risks, and contingencies
- Management expected to provide updated 2023 earnings guidance with the June 30, 2023 earnings release. This filing does not provide a clear numerical full-year earnings outlook.
- Management said liquidity and capital resources were satisfactory for foreseeable needs and expected operating income and cash flows to support operations and commitments. It did not anticipate a significant financial impact from the March 2023 banking crisis; it stated most funds were held at the two largest U.S. banks by assets.
- VITAS faces Medicare and Medicaid billing oversight and related regulatory and litigation risks. An HHS OIG audit recommended approximately $140 million in repayments based on an extrapolation of a 100-claim sample. The Medicare Administrative Contractor separately demanded $50.3 million; VITAS deposited that amount to preserve appeal rights, received a $2.5 million refund after initial review, and continued to appeal the remaining claims. The company said it could not predict the outcome or reasonably estimate a potential loss.
- A separate False Claims Act matter related to a 2020 DOJ demand was dismissed without prejudice on April 6, 2023, after DOJ declined to intervene. VITAS also retains certain obligations under a corporate integrity agreement, including independent review and reporting requirements.
- VITAS receivables are concentrated in government payors: Medicare, Medicaid, and managed Medicaid represented approximately 73% of consolidated net receivables at March 31. VITAS also relies on a primary pharmacy-services provider and a single major medical-supplies vendor; disruption could affect operations or costs.
- Debt bears a floating rate. The filing reports $21.3 million of variable-rate debt at quarter-end and estimates that a 100-basis-point rate change changes annual interest expense by $100,000 for each $10 million borrowed.
Important facts for investors to verify
- Progress and financial impact of the VITAS Medicare audit appeal, including any further refunds, repayment demands, or reserve changes.
- Whether the planned April 28 repayment of the remaining term-loan balance occurred, and the resulting debt, interest expense, and credit availability.
- VITAS staffing, retention-bonus costs, service capacity, days of care, and Medicare sequestration/cap adjustments.
- Roto-Rooter job volumes and the sustainability of water-restoration and price/mix-driven growth.
- Cash conversion and receivables collection, given the quarter’s lower operating cash flow and timing-related receivable increase.
- Actual full-year guidance when issued and the reconciliation of any non-GAAP guidance or performance measures to GAAP.