Chemed Corporation — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022. Chemed operates two segments: VITAS, a hospice and palliative-care provider, and Roto-Rooter, which provides plumbing, drain-cleaning, excavation and water-restoration services. The filing incorporates parts of the company’s 2022 Annual Report, including management’s discussion and analysis.
Financial performance and position
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $2.135 billion | $2.139 billion |
| Operating income | $343.5 million | $343.0 million |
| Net income | $249.6 million | $268.6 million |
| Diluted EPS | $16.53 | $16.85 |
| Adjusted diluted EPS (non-GAAP) | $19.75 | $19.33 |
| Adjusted EBITDA (non-GAAP) | $452.3 million; 21.2% of revenue | $461.4 million; 21.6% of revenue |
- VITAS revenue declined 4.7% to $1.202 billion; Roto-Rooter revenue rose 6.3% to $933.4 million. VITAS accounted for 56% of revenue and Roto-Rooter 44%.
- Operating margin was approximately 16.1%, versus 16.0% in 2021. Consolidated gross margin excluding depreciation was 35.8%, versus 36.0%.
- Operating cash flow was $309.9 million. Capital expenditures were $57.3 million, leaving $252.6 million of operating cash flow after capital expenditures.
- Cash and cash equivalents were $74.1 million at year-end, versus $32.9 million. Current liabilities exceeded current assets; the current ratio was 0.92, up from 0.76.
- Debt was $97.5 million, down from $185.0 million. The company had $404.7 million of available revolving credit after letters of credit. It reported compliance with debt covenants and forecast compliance through 2023.
- Chemed repurchased $114.5 million of stock and paid $22.0 million in dividends during 2022.
Material changes versus the prior year
- Consolidated revenue was nearly flat, while net income fell 7.0% and diluted EPS fell 1.9%. Adjusted diluted EPS increased 2.2%; adjusted figures exclude specified items and are non-GAAP measures.
- VITAS days of care declined 3.8%; management also cited a 1.6% unfavorable acuity-mix shift. The return of Medicare sequestration reductions affected reimbursement. Roto-Rooter growth was driven by higher revenue across major service lines, including price and service-mix effects.
- VITAS recorded $19.6 million of licensed-healthcare-worker retention bonus expense and $4.0 million of litigation settlements. A $9.97 million market-value loss on deferred-compensation trust assets contributed to other expense, compared with a $8.31 million gain in 2021; the filing says an offsetting amount is reflected in SG&A.
- The company paid down revolving borrowings and entered a new five-year credit agreement in June 2022, including a $450 million revolver and $100 million term loan. It announced plans to repay $50 million of the term loan in February 2023.
Outlook, risks and contingencies
- 2023 outlook: Management forecast VITAS revenue growth of 6.0%–7.0% before Medicare cap adjustments, average daily census growth of 3.5%–4.0%, and adjusted EBITDA margin of 16.3%–16.6% before Medicare cap and accrued retention bonuses. It estimated $11 million of Medicare cap limitations. Roto-Rooter revenue growth was forecast at 5.0%–5.5%, with adjusted EBITDA margin of 29.3%–29.5%.
- Full-year 2023 adjusted diluted EPS guidance was $20.75–$21.10, excluding stock-option expense, stock-option tax benefits, litigation costs, retention-program costs and other discrete items. Guidance assumed a 25.1% adjusted effective tax rate and 15.0 million diluted shares.
- VITAS is highly dependent on government reimbursement: more than 95% of its revenue comes from Medicare and Medicaid. Risks include reimbursement changes, claim reviews and recoupments, labor shortages and wage inflation, referral patterns, regulation, and its ability to maintain patient census.
- VITAS is appealing a Medicare Administrative Contractor repayment demand of $50.3 million arising from an OIG audit of elevated-level hospice claims. It deposited the demanded amount to preserve appeal rights and recorded it as a long-term asset. The OIG report had recommended repayment of approximately $140 million; VITAS disputes the audit’s methods and findings. The company said it could not predict the outcome or reasonably estimate any potential loss.
- VITAS received a DOJ letter declining to intervene in a False Claims Act matter; the company said it could not predict the eventual outcome or estimate potential loss. Certain obligations under a five-year Corporate Integrity Agreement remain, including an independent review.
- Chemed recorded a $1.7 million reserve for environmental liabilities related to the former DuBois business and disclosed additional contingent exposure up to $14.9 million for which it recorded no provision, stating payment was not considered probable.
- Other risks include weather sensitivity at Roto-Rooter, competition, cybersecurity and privacy threats, potential litigation and regulatory costs, variable-rate borrowing costs, and pandemic-related operational and staffing effects.
Most important facts for investors to verify
- Progress in VITAS census, admissions, staffing and margins, and whether the 2023 growth and EPS guidance assumptions are being met.
- Developments in the $50.3 million Medicare repayment appeal, the OIG audit and other VITAS billing reviews; assess possible cash, earnings and regulatory consequences.
- Medicare and Medicaid reimbursement changes, Medicare cap exposure and the effects of sequestration and inflation on VITAS profitability.
- Roto-Rooter job volumes, pricing, service mix and labor availability underlying forecast growth.
- Liquidity and capital allocation: cash generation, revolving-credit availability, planned debt repayment, repurchases and dividends.
- The filing reports audited financial statements and effective internal control over financial reporting; the auditor identified VITAS revenue implicit price concessions as a critical audit matter, citing management judgment in estimating payor adjustments.