Chemed Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022, compared with the three months ended March 31, 2021. Chemed operates VITAS Healthcare, a hospice provider, and Roto-Rooter, a plumbing, drain-cleaning and water-restoration services provider.
Financial performance
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $530.5 million | $527.4 million | +0.6% |
| Income from operations | $89.4 million | $80.4 million | +11.1% |
| Net income | $64.2 million | $65.4 million | -1.9% |
| Diluted EPS | $4.22 | $4.01 | +5.2% |
| Adjusted diluted EPS (non-GAAP) | $4.79 | $4.44 | +7.9% |
| Adjusted EBITDA (non-GAAP) | $110.2 million | $108.5 million | +1.6% |
| Adjusted EBITDA margin (non-GAAP) | 20.8% | 20.6% | +0.2 percentage points |
| Cash from operating activities | $101.1 million | $106.7 million | Down $5.6 million |
Consolidated gross margin was 36.6%, versus 35.4%. Operating margin was approximately 16.8%, versus 15.3%; net margin was approximately 12.1%, versus 12.4%. These margins are calculated from reported figures.
Roto-Rooter revenue rose 9.4% to $231.4 million; VITAS revenue fell 5.3% to $299.2 million. After-tax segment income was $43.9 million for Roto-Rooter (up from $37.2 million) and $36.5 million for VITAS (down from $40.8 million). Corporate after-tax expense increased to $16.2 million from $12.5 million.
Cash and cash equivalents were $18.2 million at March 31, 2022, down from $32.9 million at December 31, 2021. Long-term debt was $120.0 million, down from $185.0 million; the company reported $283.8 million of available revolving credit and compliance with its debt covenants. Current assets were $184.8 million and current liabilities $279.7 million. Capital expenditures were $12.6 million; operating cash flow less capital expenditures was approximately $88.4 million.
Material changes and drivers
- Revenue growth was driven by Roto-Rooter, whose major service lines increased. Plumbing revenue benefited from higher pricing and service mix; drain-cleaning revenue growth also reflected price and mix despite lower job count.
- VITAS days of care declined 4.1%. Management attributed lower revenue chiefly to fewer days of care and a less favorable acuity mix, partly offset by higher Medicare reimbursement rates. The acuity mix shift reduced quarterly revenue by approximately $7.1 million.
- Roto-Rooter gross margin increased to 52.8% from 51.9%, reflecting higher revenue and improved labor costs. VITAS gross margin decreased to 24.0% from 24.4%.
- Lower net income despite higher operating income reflected, in part, a $3.9 million loss from market-value adjustments to deferred compensation trust assets, compared with $3.0 million of income in Q1 2021. The effective tax rate rose to 24.2% from 21.8%.
- Cash flow was affected by working-capital movements, including payment of 2021 bonuses and the timing of government receipts. Financing included $65.0 million of net revolving-credit repayments and $27.4 million of treasury-stock purchases. The company repurchased 57,500 shares for $27.4 million and paid dividends of $0.36 per share.
Outlook, commentary and risks
Management issued 2022 diluted EPS guidance of $19.10–$19.50, excluding stock-option expense, stock-option exercise tax benefits, litigation costs and other discrete items. The outlook assumes an adjusted effective tax rate of 25.1% and 15.25 million diluted shares; reported 2021 adjusted diluted EPS was $19.33.
- VITAS forecast 2022 revenue before Medicare cap to decline 1.5%–2.5%, average daily census to decline 1.0%–1.5%, and adjusted EBITDA margin before Medicare cap of 15.5%–16.0%. Management estimated $12 million of Medicare cap billing limitations for 2022.
- Roto-Rooter forecast 2022 revenue growth of 8.0%–9.5% and adjusted EBITDA margin of 28.5%–29.5%.
- Management cited pandemic-related uncertainty, weak senior-housing occupancy and staffing shortages as risks. Labor-cost and margin pressure at VITAS were expected to continue through 2022, with some moderation anticipated after the October 1 reimbursement increase.
- VITAS faces ongoing regulatory matters, including a DOJ investigation concerning claims for 32 Florida patients and an OIG audit of elevated-level hospice care. Potential extrapolated repayment claims could be material, but the company said it could not predict outcomes or reasonably estimate potential losses. VITAS also continues to dispute CMS’s Medicare-cap calculation methodology; $8.7 million related to prior measurement periods was subject to withholding and appeal.
- VITAS depends heavily on Medicare and Medicaid for receivables and uses a single provider for specified pharmacy services and, beginning January 1, 2022, a single vendor for most medical supplies. The filing notes that disruption could affect operations and costs.
Most important facts to verify
- Reconcile the filing’s statement that there was no variable-rate debt outstanding at March 31 with its reported $120.0 million of long-term debt under a floating-rate credit agreement.
- Track VITAS census, patient acuity and senior-housing referrals, as well as the estimated Medicare cap exposure and CMS appeal.
- Monitor whether labor-cost pressure and Medicare reimbursement changes affect VITAS margins and the company’s 2022 guidance.
- Follow the DOJ investigation and OIG audit for potential repayment, funding or other regulatory consequences; outcomes and losses are not currently estimable from the filing.
- Assess the gap between reported and adjusted earnings: adjusted measures exclude specified costs and tax items and are non-GAAP.