Chemed Corporation — Q3 2018 Form 10-Q
Business context and period. Unaudited results cover the quarter and nine months ended September 30, 2018, compared with the same 2017 periods. Chemed operates VITAS, a hospice-care provider, and Roto-Rooter, a plumbing, drain-cleaning and water-restoration business.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $444.2M | $417.4M | $1,325.1M | $1,238.4M |
| Operating income | $61.7M | $54.0M | $176.3M | $56.5M |
| Net income | $51.2M | $35.4M | $151.2M | $43.6M |
| Diluted EPS | $3.06 | $2.13 | $8.98 | $2.60 |
| Adjusted EBITDA (non-GAAP) | $77.7M | $67.6M | $224.2M | $195.9M |
- Q3 revenue rose 6.4%; net income rose 44.7%. Nine-month revenue rose 7.0%; adjusted EBITDA increased 14.4%, with adjusted EBITDA margin of 16.9% versus 15.8%.
- Reported nine-month earnings comparisons are heavily affected by the 2017 VITAS litigation-settlement charge: $90.0M pretax and $55.8M after tax. Adjusted net income was $144.5M in 2018 versus $102.2M in 2017; adjusted diluted EPS was $8.58 versus $6.10. These are non-GAAP measures.
- Gross margin was 31.3% in Q3 versus 31.0%, and 30.9% for nine months versus 30.6%. Nine-month operating margin was 13.3% versus 4.6%, a comparison also distorted by the 2017 settlement.
- Operating cash flow for nine months was $230.6M versus $191.0M. Capital expenditures were $36.6M; cash used in investing was $48.9M. Cash increased to $67.5M from $11.1M at year-end 2017.
- At September 30, debt was $130.0M, up from $101.2M at year-end; no debt was classified as current. Current assets were $205.9M and current liabilities $180.2M. The $450M five-year revolving facility includes a $150M expansion feature; $283.6M remained available after $36.4M of letters of credit. Chemed reported covenant compliance.
- Chemed repurchased $122.0M of shares in the first nine months and paid $13.9M in dividends. The quarterly dividend was $0.30 per share, versus $0.28 a year earlier.
Changes, outlook and key commentary
- Q3 growth came from both businesses: Roto-Rooter revenue increased 10.8% and VITAS 4.4%. For nine months, segment growth was 13.6% and 4.0%, respectively. VITAS average daily census grew 7.8% in Q3 and 7.2% year to date; routine home-care days increased while inpatient-care days declined.
- Management attributed Roto-Rooter growth to higher pricing, job counts and water-restoration activity. VITAS growth reflected census expansion and a 0.8% Medicare reimbursement-rate increase, partly offset by acuity mix and Medicare cap reductions.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method; 2017 was not restated. It reclassified certain VITAS and Roto-Rooter items from expense to contra-revenue, reducing reported 2018 revenue by $7.2M in Q3 and $21.8M year to date versus the prior presentation, with no net-income impact. This limits direct revenue and margin comparisons.
- 2018 outlook: VITAS expects full-year revenue growth of 4.5%–5.0% before Medicare cap, admissions growth of about 3.5%–4.0%, average daily census growth of about 6.7%, and adjusted EBITDA margin of 15.9% before cap. Management estimates $1.3M of fourth-quarter Medicare cap billing limitations. Roto-Rooter expects revenue growth of 13.0%–14.0% and adjusted EBITDA margin of about 23.6%. Chemed expects operating income and cash flows to support operations and commitments.
- VITAS completed a $11.0M Florida hospice acquisition on September 26. On October 1, after quarter-end, Roto-Rooter acquired five Northern California franchises for $38.4M. Management said hurricane-related losses or business interruptions were not significant.
Risks, contingencies and unusual items
- VITAS is highly exposed to government reimbursement: more than 90% of its service revenue came from Medicare and Medicaid. Medicare cap rules reduced Q3 revenue by about $2.0M; the filing also reports $0.5M of net cap reductions for the first nine months of 2018, including prior-period adjustments. Management forecasts further fourth-quarter cap limitations.
- VITAS disputes CMS’s “as if” sequestration methodology and has appealed; $3.2M of additional Medicare cap amounts for 2013–2017 were reported as owed and subject to withholding. The filing does not resolve the appeal’s outcome.
- VITAS remains subject to a five-year corporate integrity agreement following the 2017 False Claims Act settlement. Breach could lead to stipulated penalties or exclusion from federal healthcare programs. Separate California employee class and wage-related suits and a shareholder derivative case remain pending; the company cannot estimate loss probability or range for the employee cases.
- The company’s $130.0M variable-rate debt exposes it to interest-rate changes. VITAS also relies on one provider for more than 90% of its pharmacy services. The company said there were no material risk-factor changes from its latest Form 10-K.
- The 2018 effective tax rate fell to 18.6% for Q3 and 14.5% year to date, from 34.7% and 25.8%, respectively, reflecting tax reform and stock-option tax benefits. Nine-month excess stock-compensation tax benefits reduced tax expense by $18.6M.
- Chemed expects adoption of the lease accounting standard in 2019 to materially increase reported assets and liabilities; it had not yet quantified the effect and did not expect a material impact on net income or cash flows.
Important facts for investors to verify
- How VITAS census, admissions, acuity mix and Medicare cap exposure track against management’s full-year outlook.
- The outcome and cash impact of the CMS cap-methodology appeal, including the reported $3.2M withholding dispute.
- Whether Roto-Rooter’s growth and margins persist after the California franchise acquisition and related financing.
- Comparable operating performance after separating ASC 606 reclassifications, the 2017 settlement and unusually large stock-option tax benefits; review the company’s non-GAAP reconciliations.
- Developments in VITAS litigation and compliance obligations, and the quantified balance-sheet impact of the upcoming lease standard.