Chemed Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019; comparisons are with the same 2018 periods. Chemed operates through VITAS Healthcare, a hospice provider, and Roto-Rooter, which provides plumbing, drain-cleaning and water-restoration services. Dollar amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $480.6 | $444.2 | $1,416.2 | $1,325.1 |
| Operating income | $64.9 | $61.7 | $179.9 | $176.3 |
| Net income | $58.9 | $51.2 | $154.3 | $151.2 |
| Diluted EPS | $3.56 | $3.06 | $9.35 | $8.98 |
| Adjusted diluted EPS (non-GAAP) | $3.46 | $3.07 | $9.73 | $8.58 |
| Adjusted EBITDA (non-GAAP) | $86.9 | $77.7 | $246.8 | $224.2 |
| Adjusted EBITDA margin (non-GAAP) | 18.1% | 17.5% | 17.4% | 16.9% |
Q3 revenue rose 8.2%, net income 15.0% and diluted EPS 16.3% year over year. For the first nine months, revenue increased 6.9%, net income 2.1% and diluted EPS 4.1%. Adjusted figures are non-GAAP measures; the filing provides reconciliations.
Consolidated gross margin was 31.7% in Q3 versus 31.3%, and 31.2% for the first nine months versus 30.9%. Q3 VITAS revenue increased 6.6% and Roto-Rooter revenue 11.6%; nine-month growth was 5.7% and 9.3%, respectively. VITAS total days of care grew 6.3% in both periods. Roto-Rooter’s growth reflected higher revenue across its major service lines, including price/service mix and job-count increases.
Nine-month operating cash flow was $237.6 versus $230.6 in 2018. Investing used $177.7, including $138.0 for acquisitions and $39.8 for capital expenditures. Financing used $55.7, including $71.9 of share repurchases and $14.7 of dividends; the company also repurchased no shares in Q3. Cash was $9.1 at September 30, 2019.
Long-term debt was $130.0, up from $89.2 at year-end 2018, mainly reflecting acquisition funding. The $450.0 revolving facility had approximately $282.1 of available capacity after $37.9 of standby letters of credit. Chemed reported compliance with debt covenants. Current assets were $167.8 and current liabilities $251.5. The company stated that liquidity and capital sources were satisfactory for foreseeable needs.
Material changes and unusual items
- Chemed acquired 14 Roto-Rooter franchise territories and related assets, including a plumbing-supply business, for approximately $120.0 in September, and acquired an Oakland franchise for $18.0 in July. The preliminary purchase allocation added $66.0 of goodwill and $59.2 of reacquired franchise rights. Acquired businesses’ post-close revenue and earnings were not material to reported results.
- ASC 842 lease accounting was adopted in 2019. At September 30, lease right-of-use assets were $103.3 and lease liabilities were $115.8. The filing says adoption did not materially affect net income or cash flows; prior-period figures were not restated.
- Nine-month results included a $6.0 VITAS legal-settlement charge and a $2.3 impairment loss on transportation equipment. Acquisition costs and amortization of acquired franchise rights also affected results.
- The Q3 effective tax rate was 11.9% versus 18.6%, largely reflecting $8.8 of excess tax benefits from stock compensation. The nine-month rate was 15.2% versus 14.5%.
Outlook, commentary and principal risks
The filing gives no specific earnings or revenue guidance. Management attributed VITAS growth chiefly to more days of care and a roughly 0.5% Medicare reimbursement-rate increase. In the first nine months, those gains were partly offset by $7.9 of Medicare cap revenue reductions, compared with $0.7 in the prior-year period. A Medicare cap liability of $11.8 was recorded at September 30. VITAS is appealing CMS’s “as if” sequestration methodology; the company said $6.7 was owed for cap amounts across 2013–2019 and was being withheld from payments.
- VITAS operates in a heavily regulated sector and is subject to audits, investigations and payment limits. Its five-year corporate integrity agreement requires monitoring and compliance obligations; breach could result in penalties or exclusion from federal healthcare programs.
- A California VITAS wage-and-hour settlement of $5.75 plus employment taxes, approximately $6.0 accrued, was pending court approval; the approval hearing was scheduled for December 2, 2019. A separate Roto-Rooter California employee class action remained unresolved, with loss probability and range not estimable.
- More than 90% of VITAS pharmacy-service purchases came from one provider in the periods presented. More than 90% of VITAS service revenue came from Medicare and Medicaid.
- Debt carries a floating interest rate. Chemed reported $130.0 of variable-rate debt; for each $10.0 borrowed, a 100-basis-point rate change would change annual interest expense by $0.1.
- Management reported no material change in previously disclosed risk factors. It cautioned that forward-looking statements are subject to risks and actual results may differ.
Investor facts to verify
- Whether VITAS’s Medicare cap estimates, CMS appeal and withheld payments change, including the recorded $11.8 liability and disputed $6.7.
- Final approval and payment of the VITAS California settlement, and developments in the Roto-Rooter class action and other regulatory matters.
- Post-acquisition performance and final purchase-price allocations for the 2019 Roto-Rooter acquisitions, including the expected amortization of acquired franchise rights.
- Cash generation, acquisition funding, floating-rate debt exposure and continued compliance with credit covenants.
- Underlying performance excluding stock-compensation tax benefits and other adjustments; reported adjusted measures are non-GAAP.