Chemed Corporation — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. The filing is an annual report, not a standalone fourth-quarter filing; quarterly figures below are from its unaudited quarterly summary. Chemed operates VITAS, a hospice and palliative-care provider, and Roto-Rooter, a plumbing, drain-cleaning and water-restoration business.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Revenue | $2.080 billion | $1.939 billion |
| Operating income | $389.7 million | $257.4 million |
| Net income | $319.5 million | $219.9 million |
| Diluted EPS | $19.48 | $13.31 |
| Adjusted diluted EPS (non-GAAP) | $18.08 | $13.95 |
| Cash from operations | $489.3 million | $301.2 million |
| Capital expenditures | $58.8 million | $53.0 million |
Revenue increased 7.3% year over year. Gross margin excluding depreciation was 33.7%, up from 31.8%; operating margin was approximately 18.7%, compared with 13.3%. Reported earnings included $80.2 million of CARES Act grant income, partly offset by $39.3 million of direct COVID-19 costs. The grant contributed $59.8 million to after-tax earnings. Adjusted results exclude the grant and specified costs and other items; they are non-GAAP measures.
- VITAS: Revenue was $1.335 billion, up 4.2%; after-tax segment earnings were $238.8 million versus $155.8 million. Growth reflected reimbursement-rate increases, more days of care and a lower Medicare cap adjustment. Improved labor management also supported margins. Medicare cap revenue reductions were $6.7 million, down from $12.4 million.
- Roto-Rooter: Revenue was $744.9 million, up 13.3%; after-tax segment earnings were $120.4 million versus $103.7 million. Growth came across major service lines, including higher job counts, pricing and service mix.
- Fourth quarter: Revenue was $533.3 million versus $522.3 million in Q4 2019; net income was $113.8 million versus $65.6 million, and diluted EPS was $6.96 versus $3.96. Q4 2020 included $48.0 million of CARES Act grant income and $3.8 million of direct COVID-related costs.
Cash, debt and liquidity
Cash and cash equivalents were $162.7 million at year-end, compared with $6.2 million in 2019. Chemed repaid $90.0 million of debt and had no long-term debt outstanding at December 31, 2020. Its $450 million revolving credit facility had approximately $412.1 million of unused eligible capacity, after $37.9 million of standby letters of credit. The current ratio improved to 1.10 from 0.73. Operating cash flow included $36.4 million of deferred employer payroll taxes; $18.2 million was classified as current and $18.2 million as long-term. The company repurchased $175.6 million of shares and paid $21.1 million in dividends.
Material changes, outlook and risks
- COVID-19 and government support: Both businesses remained classified as critical infrastructure, but the pandemic changed demand, referral patterns, service mix and staffing needs. VITAS received $80.2 million from the CARES Act Provider Relief Fund and recognized the full amount in 2020. The filing notes that grant-use rules continued to evolve. The 2% Medicare sequestration reduction was suspended for part of 2020 and extended through March 31, 2021; Chemed recognized approximately $16.8 million of 2020 revenue from the suspension.
- 2021 outlook: Management estimated VITAS revenue before Medicare cap adjustments would decline approximately 4%, average daily census would decline approximately 5%, and adjusted EBITDA margin before the cap would be 19.4%. It estimated $10 million of Medicare cap billing limitations. Roto-Rooter revenue growth was forecast at 5%–6%, with a 26.0% adjusted EBITDA margin. Adjusted diluted EPS guidance was $17.00–$17.50, excluding specified items; management cautioned that the pandemic could materially affect the outlook.
- Reimbursement and regulation: VITAS depends heavily on Medicare and Medicaid payments—more than 90% of its revenue is described as government-funded. Rate changes, claim reviews, Medicare caps, audits, labor-cost inflation or adverse regulatory action could affect revenue and profitability. The Medicare cap liability was $15.1 million at year-end. VITAS is appealing CMS’s “as if” sequestration methodology, which the company says resulted in $8.7 million of claimed amounts withheld or to be withheld.
- Legal and compliance matters: VITAS remains subject to a five-year Corporate Integrity Agreement entered in 2017 after a False Claims Act settlement, without admission of wrongdoing. In October 2020, VITAS received a DOJ Civil Investigative Demand concerning alleged false hospice claims for 32 Florida patients; the company is cooperating and cannot predict the outcome. The filing also describes employment-related settlements, including a $2.6 million Roto-Rooter settlement and a VITAS California settlement recorded at $5.75 million plus employment taxes.
- Other exposures: The company recorded $1.7 million for environmental obligations related to the former DuBois business and disclosed contingent additional exposure up to $14.9 million, which management did not consider probable. Other stated risks include skilled-worker shortages, cybersecurity, litigation and insurance claims, weather effects on Roto-Rooter, and hurricane exposure in south Florida.
Important facts for investors to verify
- How much of 2020 earnings and operating cash flow reflects temporary CARES Act support, sequestration relief and payroll-tax deferrals, and how these items affect comparisons and 2021 performance.
- VITAS’s patient census, referral mix, nursing-home admissions, labor costs and progress against the 2021 outlook.
- Future Medicare cap adjustments, the $15.1 million recorded liability and the status and potential effects of the CMS sequestration-methodology appeal.
- The status and potential financial or operating consequences of the DOJ inquiry, the Corporate Integrity Agreement and other legal or regulatory matters.
- Availability of revolving credit and compliance with debt covenants if operating conditions or cash needs change.