Chemed Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; comparisons are to the corresponding 2021 periods. Chemed operates VITAS hospice care and Roto-Rooter plumbing, drain-cleaning and water-restoration services. Financial amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $526.5 | $538.7 | $1,588.3 | $1,598.3 |
| Operating income | $80.9 | $92.9 | $262.2 | $245.0 |
| Net income | $56.9 | $72.0 | $187.5 | $193.9 |
| Diluted EPS | $3.78 | $4.55 | $12.41 | $12.06 |
| Adjusted diluted EPS (non-GAAP) | $4.74 | $5.06 | $14.37 | $14.09 |
| Adjusted EBITDA (non-GAAP) | $108.7 | $119.4 | $329.8 | $338.8 |
| Adjusted EBITDA margin (non-GAAP) | 20.7% | 22.2% | 20.8% | 21.2% |
Q3 consolidated gross margin was 34.1%, versus 36.5%; for the nine months it was 35.8%, versus 35.4%. Q3 revenue declined 2.3% as VITAS revenue fell 6.6%, partly offset by 3.9% growth at Roto-Rooter. Nine-month revenue declined 0.6%, with VITAS down 5.5% and Roto-Rooter up 6.4%. Nine-month diluted EPS increased despite lower net income, alongside a lower average diluted share count (15.1 million versus 16.1 million).
For the first nine months, operating cash flow was $209.7 million, down from $245.0 million; capital expenditures were $39.1 million. Cash declined to $7.8 million from $32.9 million at year-end 2021. Net cash used in financing was $194.9 million, including $101.5 million of treasury-stock purchases and $16.4 million of dividends. The quarterly dividend was $0.38 per share.
At September 30, 2022, debt was $100.9 million, compared with $185.0 million at December 31, 2021. The company had a $450 million revolving facility, $100 million term loan, and approximately $400.7 million of available revolving capacity after letters of credit. The term loan bears floating interest at SOFR plus 100 basis points at quarter-end. Chemed reported compliance with debt covenants. Current assets were $198.9 million and current liabilities $298.2 million; these include operating-lease liabilities and should not be read as a standalone measure of available borrowing liquidity.
Drivers, outlook and significant items
- VITAS: Nine-month days of care fell 4.1%. Management cited lower volumes, adverse acuity mix, and the phased return of the 2% Medicare sequestration reduction. The company recorded $5.1 million of Medicare cap revenue reductions for the 2022 government fiscal year through September.
- Roto-Rooter: Revenue growth reflected higher pricing and service mix across major lines, including plumbing and water restoration; job counts declined in some core services. Nine-month segment after-tax income rose to $138.6 million from $124.5 million.
- Healthcare workforce: VITAS began a temporary hiring and retention bonus program for licensed healthcare workers. It accrued $9.6 million of expense in Q3 (approximately $7.1 million after tax), weighing on VITAS margins and earnings.
- 2022 outlook: Management forecast VITAS revenue before Medicare cap to decline 4.5%–5.0%, average daily census to decline 3.4%, and adjusted EBITDA margin before Medicare cap of 17.1%–17.2%. Estimated Medicare cap billing limitations were $8.1 million. Roto-Rooter revenue growth was forecast at 6.2%–6.5%, with adjusted EBITDA margin of 29.5%–29.7%. Adjusted diluted EPS guidance was raised to $19.60–$19.70 from $19.30–$19.50, versus 2021 adjusted EPS of $19.33. Guidance excludes specified items, including stock-option expense, stock-option tax benefits, litigation costs and retention-program costs. Management cautioned that pandemic-related uncertainty, inflation and potential recession make forecasting difficult.
- Regulatory contingency: A government OIG audit of VITAS claims for April 2017–March 2019 recommended approximately $140 million in repayment. VITAS disputes the audit. Its Medicare contractor separately demanded $50.3 million; VITAS deposited that amount through immediate recoupment to preserve appeal rights and recorded it as a long-term asset. The company intends to appeal and said it could not estimate the eventual outcome or potential loss.
- Other unusual effects and risks: Market-value losses on deferred-compensation trust assets drove other expense of $3.1 million in Q3 and $11.9 million for the nine months, versus gains in 2021. VITAS also faces ongoing government inquiries and False Claims Act matters, and depends on Medicare/Medicaid payments and key supply providers. Management stated the pandemic’s ultimate effects remain uncertain. No material changes to previously disclosed risk factors were reported.
Key facts for investors to verify
- Progress, appeal status and potential financial exposure from the $50.3 million VITAS repayment demand and the larger OIG audit recommendation.
- VITAS census, admissions, length-of-stay and acuity trends, along with Medicare cap adjustments and sequestration effects.
- Whether healthcare-worker recruitment and retention improve, and the continuing cost and margin impact of the bonus program.
- Delivery against 2022 segment and adjusted EPS guidance, including the stated exclusions and assumptions.
- Cash generation, share repurchases, floating-rate debt costs and continued covenant compliance.
Adjusted EPS, adjusted EBITDA and adjusted EBITDA margin are non-GAAP measures; the filing provides reconciliations and cautions that these measures are not substitutes for GAAP results.